Lecture 2: Setting the Context

Question 1

What is absolute advantage?

Answer 1

countries should export products that they produce efficiently and import products they cannot

Question 2

What is a key question of absolute advantage theory? And what is the answer?

Answer 2

What relevance international trade has to a country that has no absolute advantage? Theory of comparative advantage

Question 3

What is the theory of comparative advantage?

Answer 3

even if one country has absolute advantage over another country, both countries are still mutually advantageous by specializing in producing and exporting goods in which its comparative advantage is greatest, or comparative disadvantage is smallest

Question 4

What is a key problem of comparative advantage? What is the answer?

Answer 4

the theory assumes that countries will specialize completely in those products in which they have a comparative advantage. Hecksher and Ohlin’s Factor Proportions Hypothesis

Question 5

What is factor proportions hypothesis?

Answer 5

countries will tend to specialize in producing good that use their abundant factors of production more intensively, and will import goods the use their scare factors more intensively

Question 6

What is a key problem of factor proportions hypothesis?

Answer 6

no adequate explanation of manufacturing activities in advanced industrialized economies

Question 7

What is the product cycle theory?

Answer 7

firms in different countries will specialize in their manufacture depending upon the particular stage the product is in. In the later life of a product, lower labour cost countries have the comparative advantage

Question 8

What is choice architecture?

Answer 8

the design of different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision-making

Question 9

What are the qualifications to the case for free trade?

Answer 9

• reciprocity
• the optimal tariff
• infant industries
• revenue raising
• national security
• adjustment costs
• health, safety, and environmental concerns

Question 10

What is the Prisoners Dilemma in relation to reciprocity and how can it be avoided?

Answer 10

Country 1 refuses to remove any existing trade restrictions on imports unless its trading partner agree to do the same but the trading partners knows country 1’s interest is to liberalize no matter what so they withhold hoping country 1 liberalizes for free. This can be avoided with trade agreements that have reciprocal tariffs

Question 11

What happens when a monopsony power tariff exporters in optimal tariff?

Answer 11

the exporters may be forced to reduce the price of their product and absorb the tariff

Question 12

What is the benefit of infant industries? who can take advantage of this the most?

Answer 12

Domestic industry can develop by selling to a protected domestic market. LDC under the GATT

Question 13

What constitute a vast majority of government revenue for industrialized countries?

Answer 13

income, consumption, and business taxes

Question 14

What is the case for national security in the case of imports and exports?

Answer 14

A case for trade restrictions on imports is to protect domestic industries. A trade restriction on export is sometimes invoked to restrict exports of strategically sensitive products or military material to unfriendly countries

Question 15

What are adjustment costs?

Answer 15

firms, workers, and communities may face adjustment costs with abrupt forms of trade liberalization

Question 16

What concerns can justify trade restrictions of an importing country?

Answer 16

to protect health, safety, and environmental conditions of importing country

Question 17

What are objections to Free Trade?

Answer 17

• globalization is leading to global monoculture
• trade liberalization exacerbates inequalities of wealth between and within countries and threatens the welfare state
• trade liberalization trumps environmental, health, and safety, labour standards, and human rights concerns
• trade liberalizations undermine economic self-sufficiency in food production and other staples, creating dangerous dependencies on foreigners
• the WTO is an undemocratic and unaccountable form of global government that improperly constrains domestic political sovereignty and democratic politics

Question 18

What is a refute for the critiques of free trade?

Answer 18

trade liberalization is likely to increase average per capita incomes by increasing economic productivity

Question 19

What is the Smoot-Hawley Tariff?

Answer 19

raised average duties 60% in the US on imported goods and provoked retaliation policies by trading partners

Question 20

What is NTTB?

Answer 20

Non-tarrif trade barriers

Question 21

Who is in NAFTA?

Answer 21

US, Canada, Mexico

Question 22

Who is in MERCOSUR?

Answer 22

latin America

Question 23

Who is in CARICOM?

Answer 23

Caribbean

Question 24

Who is in ASEAN?

Answer 24

Asia

Question 25

Who is in COMESA?

Answer 25

Eastern and Southern Africa

Question 26

What does Article 27 have to say about tariffs?

Answer 26

periodic negotiations on mutually beneficial tariffs, when agreed on they are considered tariff bindings, all members must adhere to them

Question 27

What does article 7 have to say about tariffs?

Answer 27

value for customs purposes of imports must be actual value

Question 28

What does article 8 have to say about tariffs?

Answer 28

restricts administrative charges on inbound goods to cost of services rendered

Question 29

What does article 11 have to say about quantitative restrictions?

Answer 29

prohibits use of quotas or import/export restrictions on importation or exportation of good because if barriers of trade were expressed solely as tariffs, the relative transparency of tariffs relative to quotas make their reduction possible overtime through negotiation rounds

Question 30

What are exceptions to article 11?

Answer 30

• agricultural trade
• art. 12 and art. 18 allow quotas is there is a balance of payment problems or if a developing country is protecting an infant industry

Question 31

What does art. 1 have to say about non-discrimination?

Answer 31

duties for different countries must be the same between like-products

Question 32

What does art. 3 have to say about non-discrimination?

Answer 32

once boarder duties have been paid, like-products from foreign countries will not have internal taxes places on them that domestic like-products do not have

Question 33

What leads to countervailing duties under art. 5?

Answer 33

country A subsidizes its exports into country B’s market and country B can place a countervailing duty to level to playing field of their own domestic prices with the incoming international prices of products

Question 34

What is SPS?

Answer 34

the Ssnitary and Photo-sanitary Measures Agreement

Question 35

What is TBT?

Answer 35

technical barriers agreement