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CHAPTER 7 Governmental Influence on Trade 1. Governmental restrictions and incentives to trade are known as _____. a. terms of trade b. import substitution c. protectionism d. customs valuation Answer: c. protectionism 2. The term protectionism when applied to international trade refers to _____. a. governmental restrictions and incentives to affect trade flows b. payments to dock workers to prevent pilferage of shipments c. border checks to prevent entry of illegal merchandise d. methods used to prevent the international spread of communicable diseases Answer: a. governmental restrictions and incentives to affect trade flows 3. Why should managers have an understanding of trade protectionism? a. Trade protectionism targets factor endowments, thus affecting the best country to locate production. b. Trade protectionism may limit a company's ability to sell abroad or its ability to compete at home. c. Trade protectionism may limit the number of people permitted to practice a specific profession. d. Trade protectionism may prevent companies' enactment of merger and acquisition agreements. Answer: b. Trade protectionism may limit a company's ability to sell abroad or its ability to compete at home. 4. Why should managers have an understanding of trade protectionism? a. Trade protectionism may limit the number of people permitted to practice a specific profession. b. Trade protectionism targets factor endowments, thus affecting the best country to locate production. c. Trade protectionism may prevent companies' enactment of merger and acquisition agreements. d. Trade protectionism may make it difficult for a company to buy what it needs from foreign suppliers. Answer: d. Trade protectionism may make it difficult for a company to buy what it needs from foreign suppliers. 5. When a government imposes import restrictions to help an industry at home that may suffer from import competition, it is apt to _____. a. hurt another of its industries b. shift import purchases from one country to another c. lower the prices the protected industry can charge d. cause consumers to engage in protest marches Answer: a. hurt another of its industries 6. One of the purposes of the Multifiber Arrangement (MFA) was to help workers in low-income countries.What was the result? a. Most low-income countries' workers were helped, but at the expense of workers in high-income countries. b. It helped the workers in some low-income countries while disadvantaging those in others. c. It spurred companies in high-income countries to develop efficient competitive methods, thus preventing developing countries' production from becoming competitive in world markets. d. Consumers in high-income countries boycotted the imports because low-income countries were not protecting intellectual property sufficiently. Answer: b. It helped the workers in some low-income countries while disadvantaging those in others. 7. Assume a government is considering import restrictions because imports are hurting a particular industry. Which of the following groups is least apt to become involved in trying to persuade the government to enact the restrictions? a. companies in the endangered industry b. companies involved in importing the competitive products c. companies using the imported product in their production d. final consumers Answer: d. final consumers 8. Why do consumers seldom get involved in protesting about import restrictions that raise the prices they pay? a. They reason that if the import restrictions are removed, the foreign producers will raise their prices to that of the domestic producers anyway. b. In many countries, there are prohibitions on the banding together of consumers to influence political actions. c. Typically, although the added costs to consumers are high in aggregate, they are fairly trivial for most individual consumers. d. They reason that if they do something to hurt domestic employment for one product, the workers making that product will then do something that will hurt their own employment. Answer: c. Typically, although the added costs to consumers are high in aggregate, they are fairly trivial for most individual consumers. 9. Unemployed workers are most apt to form a pressure group to support _____. a. export restrictions b. import restrictions c. export subsidies d. import subsidies Answer: b. import restrictions 10. Imports can stimulate exports by _____. a. redistributing the work force b. curtailing domestic competition c. allowing workers to have more leisure d. increasing foreign income Answer: d. increasing foreign income 11. Successful trade retaliation is most apt to be incurred _____. a. on agricultural products b. on manufactured products c. by a large-trading country d. by a small-trading country Answer: c. by a large-trading country 12. Assume a country limits imports to increase domestic employment. The limitation may fail to work fully for all the following reasons except _____. a. employees will move from an unprotected industry to a newly protected one b. other countries retaliate with restrictions of their own c. importing companies decrease their employment d. consumers abroad lose income that they might otherwise use to buy from the protecting country Answer: a. employees will move from an unprotected industry to a newly protected one 13. The infant industry argument for protection holds that _____. a. industries producing goods for infants should get government subsidies and protection b. industries particularly important for the national economy should be subsidized c. given the vulnerability of infants, products for their use should be heavily scrutinized by customs d. an industry needs government protection from imports until it becomes competitive enough in world markets Answer: d. an industry needs government protection from imports until it becomes competitive enough in world markets 14. The rationale for the infant industry argument is that _____. a. incubator centers in which business, government, and academia cooperate will develop entrepreneurial companies b. a country should give one firm in an industry a monopoly status so that it will grow large enough to be competitive internationally c. it takes time for an industry to become competitive in world markets, thus protection will allow this industry to pass the critical period d. lower restrictions should be placed on products coming from countries where a government has a large sphere of political influence Answer: c. it takes time for an industry to become competitive in world markets, thus protection will allow this industry to pass the critical period 15. A problem that can arise in using trade protectionism to develop international competitiveness for a domestic industry is that _____. a. it is difficult to identify those industries that have a high probability of reaching competitiveness. b. assistance should be given only if entry barriers to new firms are very low c. the protecting countries lose too much revenues from import duties d. a short product life cycle makes the industry quickly noncompetitive Answer: a. it is difficult to identify those industries that have a high probability of reaching competitiveness. 16. Which of the following least supports the infant industry argument for protection? a. Total unit costs decrease through economies of scale. b. Increased tariffs to prevent foreign competition will result in added governmental revenues. c. If the industry faces high entry barriers and efficient foreign rivals, local entrepreneurs may lack the means to become competitive without assistance. d. Experience of operating over time should lead to learning and higher productivity. Answer: b. Increased tariffs to prevent foreign competition will result in added governmental revenues. 17. All of the following are reasons given for low-income countries to use protection to spur industrialization except _____. a. industrial countries have tended to grow more rapidly than agricultural ones b. fear that industrial countries will cease supplying them with manufactured products c. the need to diversify dependence on primary products because of wide swings in their prices d. prices of manufactured products have historically risen faster than the prices of manufactured products Answer: b. fear that industrial countries will cease supplying them with manufactured products 18. Terms of trade refers to _____. a. the quantity of imports that a given quantity of a country's exports can buy b. specific requirements placed on imports at the port of entry c. terms agreed upon by two countries to regulate bilateral trade between them d. a statement of accounts showing the sum of imports and exports for a country during a specified period of time, usually one year Answer: a. the quantity of imports that a given quantity of a country's exports can buy 19. Low-income countries have sometimes adopted policies to shift people out of agriculture and into industry by protecting manufactured production. One of the problems they have encountered is _____. a. people have been too reluctant to leave rural areas to go to the cities b. the cost of infrastructure (such as roads and electricity) increases in rural areas because of the shortage of workers there c. demand for social and political services has increased excessively in the cities d. high-income countries have retaliated with protection of products from the low-income countries. Answer: c. demand for social and political services has increased excessively in the cities 20. The argument for import protection in low-income countries to bring about industrialization differs from the infant industry argument in that _____. a. the success of such a policy is judged on the ability to become more independent of other countries b. the emphasis is on labor-intensive production c. the emphasis is on using locally available raw materials d. it presumes there will be economic gains even if output does not become internationally competitive Answer: d. it presumes there will be economic gains even if output does not become internationally competitive 21. Import substitution is _____. a. an industrialization program promoting products that would otherwise be imported b. an industrialization policy emphasizing industries that will have export capabilities c. the quantity of imports that a given quantity of a country's exports can buy d. the protection of strategic industries Answer: a. an industrialization program promoting products that would otherwise be imported 22. Export-led development refers to _____. a. a country's efforts to promote its exports in order to cut its trade deficits b. an industrialization policy promoting products that would otherwise be imported c. an industrialization program emphasizing industries that will have export capabilities d. infrastructure development drops because of the loss of revenue from export tariffs Answer: c. an industrialization program emphasizing industries that will have export capabilities 23. Why have many countries come to believe that an export-led development policy is better than an import substitution policy? a. When targeting industries to develop, it is easier to identify potentially competitive ones when using export-led development policies. b. Export-led development policies negate the need to attract foreign investment. c. Economies diversify more when using export-led development policies. d. Some countries have achieved more economic growth through export-led development policies than other countries have achieved through import substitution policies. Answer: d. Some countries have achieved more economic growth through export-led development policies than other countries have achieved through import substitution policies. 24. The relationship between import substitution policies and export-led development policies is best characterized by the following: _____. a. import-substitution policies are more apt to attract production of mature products, whereas export-led development policies attract more production of growth products b. the two are hard to distinguish because production under import substitution may eventually be exported c. production under import substitution policies is more apt to be located in urban areas d. production under import substitution policies is apt to be more labor intensive Answer: b. the two are hard to distinguish because production under import substitution may eventually be exported 25. The comparable access argument for trade restrictions says that _____. a. the terms of trade will deteriorate for countries that have lower import restrictions than their trading partners b. this is a requirement for export-led development policies to work as intended c. in industries where steep cost decreases result from higher production levels, a company without comparable access to its competitors' markets will be disadvantaged d. by imposing import restrictions, foreign companies will lower their prices Answer: c. in industries where steep cost decreases result from higher production levels, a company without comparable access to its competitors' markets will be disadvantaged 26. It is sometimes contended that by imposing import controls a country might be able to increase its exports. This contention is premised on _____. a. the country's currency devaluation, which decreases the price of its exports b. using the import taxes to institute efficiency measures in potential export industries c. raising domestic prices in one industry so that the excess domestic profits in that industry can compensate for the cost of dumping products from another industry into foreign markets d. getting other countries to bargain away their import restrictions Answer: d. getting other countries to bargain away their import restrictions 27. With respect to balance of payments problems, the difference between currency devaluation and direct governmental influence on trade is that _____. a. currency devaluation gives the government greater flexibility b. direct influence allows greater selectivity with respect to targeted products or services c. direct influence is less susceptible to retaliation than currency devaluation d. currency devaluation is a better tool for effecting a decrease in the price of imports Answer: b. direct influence allows greater selectivity with respect to targeted products or services 28. All of the following are reasons a country might institute import restrictions to improve its balance of trade position with other countries except to _____. a. maintain essential industries b. reduce imports c. get comparable market access for its companies d. bargain away restrictions by other countries Answer: a. maintain essential industries 29. Countries sometimes establish export restrictions to _____. a. prevent smuggling b. encourage the development of substitute products c. lower prices in foreign markets d. lower prices in the domestic market Answer: d. lower prices in the domestic market 30. Countries sometimes establish export restrictions to _____. a. retaliate against foreign import controls b. raise prices in foreign markets c. encourage the development of substitute products d. reduce domestic production Answer: b. raise prices in foreign markets 31. Countries sometimes establish export restrictions to _____. a. prevent unfriendly countries from getting strategic goods b. prevent smuggling c. lower prices in foreign markets d. encourage the development of substitutes Answer: a. prevent unfriendly countries from getting strategic goods 32. All of the following are potential problems of using export controls except _____. a. there will be an incentive for other countries to develop production of their own b. domestic producers may have less incentive to increase output c. import prices may go up for the country imposing the controls d. there is more incentive for smuggling. Answer: c. import prices may go up for the country imposing the controls 33. Exporting below cost or below the home country price is _____. a. countertrade b. an export-led development policy c. a strategic trade policy d. dumping Answer: d. dumping 34. Dumping is the _____. a. underpricing of exports b. overpricing of imports c. blaming of other countries for trade imbalances d. export of hazardous materials Answer: a. underpricing of exports 35. An optimum tariff is _____. a. a tax assessed on goods shipped internationally on a per-unit basis b. the lowering of a foreign producer's price as a result of an imposed import tax c. a tax assessed on goods shipped internationally as a percentage of the goods' value d. one that maximizes tax revenue for the country imposing it Answer: b. the lowering of a foreign producer's price as a result of an imposed import tax 36. The fear countries have about foreign producers' pricing their exports artificially low is _____. a. that foreign companies will earn inadequately to repay their foreign debt b. there will be insufficient earnings to improve product technology c. foreign producers will charge exorbitant prices after putting competition out of business d. they will be unable to maintain industries needed in time of war Answer: c. foreign producers will charge exorbitant prices after putting competition out of business 37. The essential industry argument holds that _____. a. certain industries should be protected for security reasons b. a country should protect those industries that are essential for its long-term economic development c. industries with potential export capabilities should be protected d. countries should import raw materials in the short-term in order to have more supplies in the long-term Answer: a. certain industries should be protected for security reasons 38. A possible drawback to the essential industry argument for import protectionism is _____. a. that such protection hurts the balance of payments b. in times of military emergency, almost any product could be considered essential c. other countries find supplies elsewhere d. governments can easily terminate protection granted under such a policy Answer: b. in times of military emergency, almost any product could be considered essential 39. Defense arguments are sometimes used to prevent exports to unfriendly countries. This runs the risk of the targeted _____. a. country becoming politically destabilized, possibly leading to civil war b. country imposing import restrictions c. country finding alternative sources of supply or developing a capacity of its own d. countries banding together to form a cartel Answer: c. country finding alternative sources of supply or developing a capacity of its own 40. What is the main motive for countries' protection of their film/cinema industries? a. to keep prices low for their citizens b. to improve their balance of payments c. to diversify their economies d. to maintain their cultural identity and sovereignty Answer: d. to maintain their cultural identity and sovereignty 41. The most common type of tariff is the ______ tariff. a. export b. import c. optimum d. transit Answer: b. import 42. A compound tariff (duty) is one that _____. a. causes a foreign producer to lower its price b. charges a percentage import tax on the total value, but functionally imposes a higher tax on the manufactured portion of the value c. includes both a specific and ad valorem duty on the same product d. is both protective and tax generating Answer: c. includes both a specific and ad valorem duty on the same product 43. An import tariff (duty) is protective _____. a. only if it is on imports the country produces b. if it serves primarily to restrict entry of hazardous materials c. if it does not generate tax revenue d. even though the importing country does not produce the product Answer: d. even though the importing country does not produce the product 44. In addition to protection, tariffs serve to _____. a. generate revenue b. subsidize exports c. subsidize imports d. influence the mode of transportation used Answer: a. generate revenue 45. The least controversial of government subsidies are _____. a. tied aids and loans b. those paid to producers to overcome their losses c. those intended to overcome market imperfections, such as the dissemination of market information d. those paid to exporters to lower prices in foreign markets Answer: c. those intended to overcome market imperfections, such as the dissemination of market information 46. Foreign aid and loans can sometimes be considered subsidies because _____. a. such funds give companies in the recipient countries an edge over their competitors b. the recipient country is free to use them as it wishes c. such funds give recipient governments additional revenue to protect their favorite industries d. the recipient may be required to use the funds to buy from businesses in the donor countries Answer: d. the recipient may be required to use the funds to buy from businesses in the donor countries 47. The assessment of an ad valorem import duty is complicated by all of the following except determination of _____. a. whether the exporting government had subsidized production b. whether the declared value on the invoice is accurately stated c. what the product really is d. whether the product's origin is the same as the one stated on import documents. Answer: a. whether the exporting government had subsidized production 48. Most countries have agreed on how to assess values when their customs agents levy tariffs. Which of the following best expresses this agreement? a. They should use the value of similar goods arriving at about the same time. b. They should use the declared invoice price unless they doubt its authenticity. c. They should assess a value based on local costs to produce a similar product. d. They should assess a value based on the expected final consumer sales price. Answer: b. They should use the declared invoice price unless they doubt its authenticity. 49. What is a quota? a. a prohibition on trade b. a quantitative limit on the amount of a product that can be traded c. a countertrade arrangement d. a bilateral agreement calling for mutual access to markets Answer: b. a quantitative limit on the amount of a product that can be traded 50. A voluntary export restriction (VER) refers to _____. a. an agreement between two countries to reciprocally restrict exports to one another b. requests by governments for companies to limit exports of militarily useful technology c. limits a government places on exports to a country with which it has a temporary trade surplus d. limits placed on exports by a government of an exporting country at the request of the government of an importing country Answer: d. limits placed on exports by a government of an exporting country at the request of the government of an importing country 51. In addition to setting the total amount to be traded, quotas sometimes allocate on the basis of _____. a. country b. price c. quality d. currency of payment Answer: a. country 52. An import license is _____. a. an agreement whereby one country gives another country permission to use a patent that a company has registered there b. a requirement that exporters take merchandise in lieu of money as payment for their sales c. a requirement that permission be secured from governmental authorities before importation can be undertaken d. a government prohibition of imports from a specific country Answer: c. a requirement that permission be secured from governmental authorities before importation can be undertaken 53. All of the following are arguments that lead to protection against international service imports except _____. a. the feeling that certain service sectors should be not-for-profit b. to ensure practice in some professions by qualified personnel c. the belief that preference be given to domestic citizens for domestic jobs d. the notion that imports will lead to a security risk Answer: d. the notion that imports will lead to a security risk 54. Which of the following hypothetical examples would be a restriction on the import of services? a. The United States restricts foreign companies from carrying cargo between two U.S. cities. b. Japan restricts North Koreans from visiting Tokyo Disneyland. c. China does not allow the importation of rice from Thailand. d. Canada does not allow Air Canada to buy Brazilian aircraft, which it claims are subsidized. Answer: a. The United States restricts foreign companies from carrying cargo between two U.S. cities. 55. Assume that a citizen of Country A, say a physician or an accountant, meets the professional licensing requirements of Country B, he or she _____. a. will then have to pass a language proficiency exam before being allowed to work in Country B b. may not work in Country B in the not-for-profit sector c. may not be able to work in Country B because immigration authorities may deny a work permit d. will have to work in the not-for-profit sector in Country B for a period of time before being permitted to work for a profit-seeking organization Answer: c. may not be able to work in Country B because immigration authorities may deny a work permit 56. The belief in some countries that certain sectors, such as health care or utilities, be operated not-for-profit means that _____. a. exports from these sectors are subsidized b. foreign companies are often precluded from competing therein c. licensing standards for personnel in these sectors are stricter than for other sectors d. governments in these countries encourage service imports in these sectors to help keep costs low Answer: b. foreign companies are often precluded from competing therein 57. Which types of companies are most likely to lose from increased global protectionist measures? a. companies that have integrated their production and supply chains internationally b. companies that are domestically focused c. companies with multidomestic production facilities d. companies that enjoy advantages over competitors because of producing differentiated products Answer: a. companies that have integrated their production and supply chains internationally 58. The U.S. automobile industry has attempted to counter import competition in all the following ways except _____. a. concentrating on market niches that initially had less import competition b. lobbying for customs deposits so that importers' costs would be raised c. moving production to lower-cost countries and exporting to the United States d. effecting internal adjustments, such as cost efficiencies and improved quality Answer: b. lobbying for customs deposits so that importers' costs would be raised 59. When a company seeks import protection from tough international competition, _____. a. its government will grant that protection if the company shows that it will otherwise lose competitively b. the company may or may not get protection because governments cannot possibly help every company c. they must show that no other domestic companies will suffer if the protection is granted d. it will weaken the likelihood of getting that protection if it allies itself with other companies in its industry Answer: b. the company may or may not get protection because governments cannot possibly help every company 60. In nearly half the cases in which U.S. firms have requested protection from imports, one or more companies in the industry opposed the protection. What was the reason for opposing protection? a. They did not want consumers to have to pay higher prices that would result from protection. b. These were foreign-owned companies that saw the opportunity to serve the U.S. market from home country production. c. They feared that they would lose foreign export markets because of retaliation. d. They reasoned that they could not only successfully battle international rivals, but could gain on weaker domestic competitors that failed to do so. Answer: d. They reasoned that they could not only successfully battle international rivals, but could gain on weaker domestic competitors that failed to do so. 61. The term protectionism when applied to international trade refers to governmental restrictions and incentives to affect trade flows. Answer: True 62. Trade protectionism may limit a company's ability to sell abroad. Answer: True 63. The group most apt to become involved in disputes concerning trade protectionism is consumers. Answer: False 64. When a government imposes import restrictions to help a sensitive industry at home, it is apt to hurt another one of its industries. Answer: True 65. The countries most likely to be successful at using trade retaliation are large trading countries. Answer: True 66. Exports may stimulate imports by increasing foreign income. Answer: False 67. The infant industry argument holds that an industry needs government protection from imports until it becomes competitive enough in world markets. Answer: True 68. Support for the infant industry argument for trade protection is supported by the fact that total unit costs often decrease through economies of scale. Answer: True 69. The argument for using protectionism to bring about industrialization in developing countries presumes that gains will occur because the industry will become internationally competitive. Answer: False 70. Terms of trade refers to specific requirements placed on imports at the port of entry. Answer: False 71. Import substitution is a program promoting local production of products that would otherwise be imported. Answer: True 72. Export-led development refers to the use of export tariffs to provide revenue for infrastructure development. Answer: False 73. The argument for using import controls to promote exports is partially premised on the assumption that other countries will remove their import restrictions as a result. Answer: True 74. The comparable access argument for trade restrictions says that by imposing trade restrictions, foreign companies will lower their prices. Answer: False 75. Countries sometimes establish export restrictions to encourage the development of substitute products. Answer: False 76. Countries sometimes establish export restrictions to retaliate against foreign import controls. Answer: False 77. The lowering of a foreign producer's price as a result of an imposed import tax is known as an optimum tariff. Answer: True 78. Dumping is the export of hazardous materials. Answer: False 79. The essential industry argument holds that industries with potential export capabilities should be protected. Answer: False 80. A possible drawback of the essential industry argument for protectionism is that in times of military emergency, almost any product could be considered essential. Answer: True 81. The most common type of tariff is the export tariff. Answer: False 82. In addition to protection, tariffs serve to subsidize exports. Answer: False 83. When customs sets a value on which to place an import tariff, they ordinarily use the declared invoice price unless they doubt its authenticity. Answer: True 84. In world trade, the least controversial of government subsidies are those intended to overcome market imperfections, such as the dissemination of market information. Answer: True 85. A quota is a quantitative limit on the amount of a product that can be traded. Answer: True 86. A voluntary export restriction (VER) limits foreign sales of militarily useful goods. Answer: False 87. An argument for protection against international service imports is that the imports would create a security risk. Answer: False 88. The belief in some countries that certain sectors should be operated not-for-profit means that foreign companies are often precluded from competing therein. Answer: True 89. Companies that have integrated their supply chains internationally are apt to lose from increased global protectionist measures. Answer: True 90. In nearly half the cases in which U.S. firms have requested protection from imports, one or more companies in the industry opposed the protection. Answer: True 91. Why might import restrictions not create more domestic employment? Answer: One problem with restricting imports in order to create jobs is that other countries might retaliate with their own restrictions. New import restrictions by a major country have usually brought quick retaliation, sometimes causing more job losses than gains in industries protected by the new restrictions. Even if no country retaliates, the restricting country will gain jobs one place and lose them somewhere else. That is because of losing import-handling jobs. Imports may also help create jobs in other industries, and these industries may form pressure groups against protectionism. 92. Explain the rationale for and problems of making the infant industry argument work as intended. Answer: The infant industry argument holds that a government should guarantee an emerging industry a large share of the domestic market until it becomes efficient enough to compete against imports. Developing countries still use this argument to support their protectionist policies. The infant industry argument is based on the logic that although the initial output costs for an industry in a given country may be so high as to make it noncompetitive in world markets, over time the costs will decrease to a level sufficient to achieve efficient production. The cost reductions may occur for two reasons: As companies gain economies of scale and employees become more efficient through experience, total unit costs drop to competitive levels. Although it is reasonable to expect costs to decrease over time, they may not go down enough, which poses two problems for protecting an industry. First, governments have difficulty identifying those industries that have a high probability of success. If infant industry protection goes to an industry that does not reduce costs enough to make it competitive against imports, changes are its owners, workers, and suppliers will constitute a formidable pressure group that may prevent the importation of a cheaper competitive product. Second, even if policymakers can ascertain which industries are likely to succeed, it does not necessarily mean that companies in those industries should receive governmental assistance. For the infant industry argument to be fully viable, future benefits should exceed early costs. 93. Why do developing countries sometimes impose import restrictions to increase their levels of industrialization? Answer: Countries with a large manufacturing base generally have higher per capita incomes than do countries without such a base. Moreover, a number of countries, such as the United States and Japan, developed an industrial base while largely preventing competition from foreign-based production. Many developing countries use protection to increase their level of industrialization because of industrial countries' economic success and experience. Specifically, they believe _____. a. surplus workers can more easily increase manufacturing output than they can increase agricultural output b. inflows of foreign investment in the industrial area will promote growth c. prices and sales of traditional agricultural products and raw materials fluctuate too much d. markets for industrial products will grow faster than markets for agricultural products 94. Compare import substitution policies with export-led development policies. Answer: Developing countries promote industrialization by restricting imports in order to produce for local consumption goods they formerly imported. This is known as import substitution. In recent years, most countries have come to believe that import substitution is not the best way to develop new industries. If the protected industries do not become efficient, consumers may have to support them by paying higher prices or higher taxes. In addition, because the industries must usually import capital equipment and other supplies, foreign exchange savings are minimal. In contrast to import substitution, some countries have achieved rapid economic growth by promoting export industries, an approach known as export-led development. These countries try to develop industries for which export markets should logically exist. Industrialization may result initially in import substitution, yet export development of the same products may be feasible later. 95. Why might governments enact export restrictions? What are the possible negative consequences of these restrictions? Answer: A country may limit exports of a product that is in short supply worldwide in order to favor domestic consumers. Typically, greater supply drops local prices beneath those in the intentionally undersupplied world markets. Countries also fear that foreign producers will price their exports so artificially low that they drive domestic producers out of business. Competition among foreign producers limits their ability to charge exorbitant prices as well as encourages them to forego selling abroad. However, the ability to price low abroad may result from high domestic prices due to a lack of competition at home or from home country governmental subsidies. 96. Explain the optimum tariff theory. Answer: The optimum tariff theory states that a foreign producer will lower its prices if the importing country places a tax on its products. If this occurs, benefits shift to the importing country because the foreign producer lowers its profits on the export sales. As long as the foreign producer lowers its price by any amount, some shift in revenue goes to the importing country and the tariff is deemed an optimum one. There are many examples of products whose prices did not rise as much as the amount of the imposed tariff; however, it is difficult to predict when, where, and which exporters will voluntarily reduce their profit margins. 97. Define dumping and discuss its effects on a country's economy. Answer: When companies export below cost or below their home country price, this is called dumping. Most countries prohibit imports of dumped products, but enforcement usually occurs only if the imported product disrupts domestic production. If there is no domestic production, then the only host country effect is a low price to its consumers. Companies may dump because they cannot otherwise build a market abroad. They can afford to dump if the competitive landscape allows them to charge high domestic prices or if their home country government subsidizes them. They may also incur short-term losses abroad if they believe they can recoup those losses after eliminating competitors in the market. Home country consumers or taxpayers seldom realize that they are, in effect, paying so that foreign consumers have low prices. A company believing it is competing against dumped products may ask its government to restrict the imports. 98. Many companies and industries argue that they should have the same access to foreign markets as foreign industries and companies have to their markets. In a short essay, discuss this issue of "comparable access" or "fairness." Answer: From an economic standpoint, comparable access argues that in industries in which increased production will greatly decrease cost, either from scale economies or learning effects, producers that lack equal access to a competitor's market will have a disadvantage in gaining enough sales to be cost-competitive. This has been noted, for example, in the semiconductor, aircraft, and telecommunications industries. The argument for equal access also is presented as one of fairness. There are at least three arguments against this fairness doctrine. First, there are advantages of freer trade, even if imposed unilaterally. Restrictions may deny one's own consumers' lower prices. Second, countries' imposition of additional import restrictions to coerce other countries to reduce their restrictions may escalate economic tensions, rather than remove trade barriers. Third, governments would find it cumbersome and expensive to negotiate separate agreements for each of the many thousands of different products and services that might be traded. 99. What are the noneconomic rationales for governmental intervention in the free movement of trade? Answer: a. Maintenance of essential industries (especially defense)—A major consideration behind governmental action on trade is the protection of essential domestic industries during peacetime so that a country is not dependent on foreign sources of supply during war. This is called the essential-industry argument. This argument for protection has much appeal in rallying support for import barriers. However, in times of real crisis or military emergency, almost any product could be essential. Because of the high cost of protecting an inefficient industry or a higher-cost domestic substitute, the essential-industry argument should not be accepted without a careful evaluation of costs, real needs, and alternatives. Once an industry becomes protected, that protection is difficult to terminate because protected companies and their employees support politicians who will support their protection from imports. b. Prevention of shipments to unfriendly countries—Groups concerned about security often use defense arguments to prevent exports, even to friendly countries, of strategic goods that might fall into the hands of potential enemies or that might be in short supply domestically. Export constraints may be valid if the exporting country assumes there will be no retaliation that prevents it from securing even more essential goods from the potential importing country. Trade controls on nondefense goods also may be used as a weapon of foreign policy to try to prevent another country from easily meeting its economic and political objectives. c. Maintenance or extension of spheres of influence—Governments frequently give aid and credits to, and encourage imports from, countries that join a political alliance or vote a certain way within international bodies. A country's trade restrictions may also coerce governments to follow certain political actions or punish companies whose governments do not follow the actions. d. Conservation of activities that help preserve a national identity—Countries are held together partially through a common sense of identity that sets their citizens apart from other nationalities. To protect this "separateness," countries limit foreign products and services in certain sectors. 100. Define and explain the different types of tariffs (duties). Answer: A tariff, or duty, the most common type of trade control, is a tax that a government levies on a good shipped internationally. If collected by the exporting country, it is known as an export tariff; if collected by a country through which the goods have passed, it is a transit tariff; if collected by the importing country, it is an import tariff. The import tariff is by far the most common. Import tariffs primarily serve as a means of raising the price of imported goods so that domestically produced goods will gain a relative price advantage. A tariff may be protective even though there is no domestic production in direct competition. Tariffs also serve as a source of governmental revenue. Import tariffs are of little importance to large industrial countries, but are a major source of revenue in many developing countries. Transit tariffs were once a major source of revenue for countries, but they have been nearly abolished through governmental treaties. A government may assess a tariff on a per-unit basis, in which case it is a specific duty. It may assess a tariff as a percentage of the value of the item, in which case it is an ad valorem duty. If it assesses both specific and an ad valorem duty on the same product, the combination is a compound duty. A specific duty is easy for customs officials who collect duties to assess because they do not need to determine a good's value on which to calculate a percentage tax. During periods of normal inflation, the specific duty will, unless changed, become a smaller percentage of a product's value and therefore be less restrictive to imports. Because an ad valorem tariff is based on the total value of the product, meaning the raw materials and the processing combined, nonindustrial countries argue that the effective tariff on the manufactured portion turns out to be higher than the published tariff rate. 101. List and define the types of nontariff barriers that limit the quantity of goods traded. Answer: a. Quotas—The most common type of import or export restriction based on quantity is the quota. From the standpoint of imports, a quota most frequently limits the quantity of a product allowed to be imported in a given year. The amount frequently reflects a guarantee that domestic producers will have access to certain percentage of the domestic market in that year. b. "Buy Local" legislation—Another form of quantitative trade control is "buy local" legislation. If government purchases are a large part of total expenditures within a country, they comprise an important part of the market. Most governments favor domestic producers in their purchases of goods. Sometimes they specify a content restriction—in which a certain percentage of the product is of local origin. c. Standards—Countries commonly have set classification, labeling, and testing standards in a manner that allows the sales of domestic products but inhibits that of foreign-made ones. The purpose of testing standards is to protect the safety or health of the domestic population. However, there have been situations where exporters have argued that such restrictions protect domestic producers instead. d. Specific permission requirements—Some countries require that potential importers or exporters secure permission from governmental authorities before conducting trade transactions, a requirement known as an import license. e. Administrative delays—Closely related to specific permission requirements are intentional administrative delays, which create uncertainty and raise the cost of carrying inventory. f. Reciprocal requirements—Governments sometimes require that exporters take merchandise in lieu of money or that they promise to buy merchandise or services in the country to which they export. This requirement is common in the aerospace and defense industries—sometimes because the importer is short of foreign currency to purchase what it wants. 102. In a short essay, list and discuss the nontariff barriers that relate to direct price influences. Answer: a. Subsidies—Countries sometimes make direct payments (called subsidies) to domestic companies to compensate them for losses incurred from selling abroad. b. Aids and loans—Governments also give aid and loans to other countries. Because the recipient is required to spend the funds in the donor country, some products can compete abroad that might otherwise be noncompetitive. Most industrial countries also provide repayment insurance for their exporters, thus reducing the risk of nonpayment for overseas sales. c. Customs valuation—Most countries have agreed on a procedure for assessing values when their customs agents levy tariffs. d. Other direct price influences—Countries frequently use other means to affect prices, including special fees, requirements that customs deposits be placed in advance of shipment, and minimum price levels at which goods can be sold after they have customs clearance. 103. What are the main arguments for limiting trade in services? Answer: Countries restrict trade in services for three reasons: a. Essentiality—Countries judge certain service industries to be essential because they serve strategic purposes or because they provide social assistance to their citizens. They sometimes prohibit private companies, foreign or domestic, in some sectors because they feel the services should not be sold for profit. b. Standards—Governments limit foreign entry into many service professions to ensure practice by qualified personnel. The licensing standards of these personnel vary by country. At present, there is little reciprocal recognition in licensing from one country to another because occupational standards and requirements differ substantially. c. Immigration—Satisfying the standards of a particular country does not guarantee that a foreigner can then work there. Governmental regulations often require that an organization—domestic or foreign—search extensively for qualified personnel locally before it can even apply for work permits for personnel it would like to bring in from abroad. 104. When a company faces import competition that threatens its market position, what alternatives might it follow? Answer: Governments' intervention in trade affects the flow of import and exports of goods between countries. Companies have several options to deal with this situation. They may (1) move operations to a lower-cost country, (2) concentrate on market niches that attract less international competition, (3) adopt internal innovations, namely greater efficiency or superior products, or (4) try to get governmental protection. Test Bank for International Business: Environments and Operations John D. Daniels, Lee H. Radebaugh, Daniel P. Sullivan 9780131869424, 9780201846188, 9780130308016, 9780201566260, 9780201107135, 9780132668668
