BUSINESS 3001 Chapter 06 The Political Economy of International Trade,100% CORRECT

BUSINESS 3001 Chapter 06 The Political Economy of International Trade True / False Questions 1. Subsidies are a trade policy instrument. True False 2. Tariffs are the most complex instrument of trade policy. True False 3. Tariffs are the instrument that the GATT and WTO have been most successful in limiting. True False 4. In recent decades, a fall in subsidies, quotas, and voluntary export restraints has been accompanied by a corresponding fall in nontariff barriers. True False 5. Nontariff barriers include subsidies, quotas, voluntary export restraints, and antidumping duties. True False 6. Specific tariffs are levied as a proportion of the value of the imported good. True False 7. Ad valorem tariffs reduce the cost of imported products relative to domestic products. True False 8. Tariffs are largely pro-producer and anti-consumer. True False 9. Tariffs increase the overall efficiency of the world economy because a protective tariff encourages domestic firms to produce products more efficiently at home that, in theory, could be produced abroad. True False 10. Export tariffs are far less common than import tariffs. True False 11. The main gains from subsidies accrue to importers, whose international competitiveness is increased as a result of these subsidies. True False 12. Japan has a long history of supporting inefficient domestic producers with farm subsidies. True False 13. A direct restriction on the quantity of some good that may be imported into a country is a quota rent. True False 14. Quotas benefit consumers the most. True False 15. The Buy America Act specifies that government agencies must give preference to American products when putting contracts for equipment out for bid unless the foreign products have a significant advantage. True False 16. Administrative trade policies are bureaucratic rules that are designed to make it easy for imports to enter a country. True False 17. Dumping is variously defined as selling goods in a foreign market at below their costs of production, or as selling goods in a foreign market at below their "fair" market value. True False 18. Antidumping policies are designed to punish foreign firms that engage in dumping industrial waste into the environment. True False 19. The fair market value of a good is normally judged to be lesser than the costs of producing that good. True False 20. Countries sometimes argue that it is necessary to protect certain industries because they are important for national security. True False 21. Protecting consumers from "dangerous" products and furthering the goals of foreign policy are types of economic arguments for intervention. True False 22. The relationship between pollution and income levels follows a linear pattern. True False 23. The infant industry argument is the oldest economic argument for government intervention. True False 24. Until the early 1980s, most economists saw little benefit in government intervention and strongly advocated a free trade policy. True False 25. Brazil's auto industry, once the world's tenth-largest and built behind tariff barriers and quotas, has been proven as one of the world's most inefficient. True False 26. Protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient. True False 27. The roots of strategic trade policy arguments can be traced back to the late 18th century and the works of Adam Smith and David Ricardo. True False 28. Several economists, including Paul Krugman, point out that although free trade policy looks appealing in theory, in practice it may be unworkable. True False 29. The Smoot-Hawley Act was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, and import quotas. True False 30. In the Uruguay Round of the WTO, member countries sought to exempt trade in services from GATT rules. True False 31. The United States wanted the WTO to allow governments to impose tariffs on goods imported from countries that did not abide by what the United States saw as fair labor practices during a WTO meeting at the end of November 1999. True False 32. Antidumping actions seem to be concentrated in certain sectors of the economy such as basic metal industries (e.g., aluminum and steel), chemicals, plastics, and machinery and electrical equipment. True False 33. The biggest defenders of agricultural subsidies are the developed nations of the world. True False 34. Free trade in agriculture could help to jump-start economic growth among the world's poorer nations and alleviate global poverty. True False 35. The threat of antidumping action enhances the ability of a firm to use aggressive pricing to gain market share in a country. True False 36. Government intervention may invite retaliation and trigger a trade war. True False Multiple Choice Questions 37. Which of the following is one of the seven main instruments utilized in trade policy? A. Local content requirements B. Licensing C. Foreign direct investment D. Employment guarantees 38. While tariffs are levied as a fixed charge for each unit of a good imported, tariffs are levied as a proportion of the value of the imported good. A. ground; ceiling B. ad hoc; nonconvertible C. posited; floating D. specific; ad valorem 39. Tariffs cause damage to because this group must pay more for certain imports. A. investors B. governments C. consumers D. producers 40. According to experts, which of the following groups most benefits from the imposition of tariffs? A. Government and producers B. Consumers and trade associations C. Exporters and importers D. Producers and foreign competitors 41. A protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad. This results in: A. an establishment of a comparative advantage over firms from other countries. B. improved productivity of the labor workforce in that country. C. higher mobility of resources within the country. D. an inefficient utilization of resources. 42. The U.S. government imposed an eight to thirty percent tariff on steel imports into the United States in March 2002. This belongs to which of the following categories? A. General B. Ad valorem C. Specific D. Ad hoc 43. Tariffs: A. reduce the price of foreign goods. B. reduce the overall efficiency of the world economy. C. help in efficient utilization of resources. D. are unambiguously pro-consumer and anti-producer. 44. One of the objectives of export tariffs is to: A. improve the efficiency of utilization of resources. B. curb the competition offered by foreign firms to domestic firms. C. reduce exports from a sector, often for political reasons. D. maintain a positive trade deficit. 45. Which of the following is a government payment to a domestic producer? A. Duty B. Subsidy C. Quota D. Tariff 46. take many forms including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms. A. Ad valorem tariffs B. Subsidies C. Quota rents D. Specific tariffs 47. By lowering production costs, subsidies help domestic producers in: A. gaining export markets. B. curtailing exports to other countries. C. meeting voluntary export restraints. D. regulating the quality of services they offer. 48. tend(s) to be one of the largest beneficiaries of subsidies in most countries. A. Banks B. Commercial airlines C. Agriculture D. Defense 49. By lowering production costs, help domestic producers compete against foreign imports. A. tariffs B. custom duties C. quotas D. subsidies 50. Governments typically pay for subsidies by: A. selling junk bonds. B. taxing individuals and corporations. C. foreign direct investment in poorer countries. D. privatization of public holdings. 51. Advocates of believe that subsidies can help a firm achieve a first-mover advantage in an emerging industry. A. strategic trade policy B. free trade C. open market system D. justice theories 52. Which of the following groups would most benefit from receiving subsidies? A. Governments B. Consumers C. Domestic producers D. Importers 53. An import quota is a direct restriction on the quantity of some good that may be by a country. A. subsidized B. imported C. dumped D. produced 54. Under a(n) , a lower tariff rate is applied to imports within the quota than those over the quota. A. tariff rate quota B. voluntary import restraint C. import tariff rent D. quota rent 55. A(n) is a quota on trade imposed by the exporting country, typically at the request of the importing country's government. A. tariff rate quota B. quota rent C. import quota D. voluntary export restraint (VER) 56. Foreign producers agree to VERs because they fear: A. a fall in demand for their products in foreign markets. B. the aggravation of protectionist pressures in their home markets. C. more damaging punitive tariffs or import quotas might follow if they do not. D. political and economic instability in foreign markets. 57. Agreeing to a VER is seen by foreign producers as a way to make the best of a bad situation by appeasing pressures in a country. A. free trade B. protectionist C. libertarian D. consumer 58. The Multi-Fiber Agreement (MFA) of 1974 fixed upper limits on exports of textiles from all major exporting countries to all major importing countries. The MFA is an example of: A. voluntary export restraint. B. local content requirement. C. subsidy. D. specific tariff. 59. The extra profit that producers make when supply is artificially limited by an import quota is referred to as a: A. trade surplus. B. quota rent. C. trade reconciliation. D. profit hike margin. 60. Both import quotas and VERs benefit by limiting import competition, but they result in higher prices, which hurt . A. domestic producers; consumers B. governments; domestic producers C. importers; foreign producers D. consumers; governments 61. A(n) requires that some specific fraction of a good must be produced domestically. A. international allocation requirement B. local content requirement C. specific quota requirement D. ad valorem portion requirement 62. Local content regulations have been widely used by developing countries to shift their manufacturing base from the simple of goods whose parts are manufactured elsewhere into the local of component parts. A. production; integration B. assembly; manufacture C. design; assembly D. generation; packaging 63. Local content regulations provide protection for a domestic producer of parts in much the same way a(n) does, by limiting foreign competition. A. greenfield investment B. international content requirement C. specific content requirement D. import quota 64. If Apple won an order to sell 500 new minicomputers to Australia, but the Australian government stipulated that 20 percent of the component parts of the minicomputers it purchased must be produced in Australia, that stipulation would be an example of a(n): A. voluntary export restraint. B. administrative policy. C. import quota. D. local content requirement. 65. The in the U.S. specifies that government agencies must give preference to American products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage. A. Export Administration Act B. Helms-Burton Act C. Hawley-Burton Act D. Buy America Act 66. In addition to the formal instruments of trade policy, informal bureaucratic rules that are designed to make it difficult for imports to enter a country are referred to as: A. regional trade inhibitors. B. back-door trade policies. C. domestic trade hurdles. D. administrative trade policies. 67. At one time, the French government required that all imported videotape recorders arrive in France through a small customs entry point that was both remote and poorly staffed. This is an example of a(n): A. regional trade inhibitor. B. domestic business hurdle. C. administrative trade policy. D. ad hoc red tape. 68. are specific duties representing a special tariff for punishing foreign firms engaged in dumping, which can be fairly substantial and stay in place for up to five years. A. Punitive damages B. Civil duties C. Import damages D. Countervailing duties 69. In the context of international trade, is defined as selling goods in a foreign market at a price below their costs of production or as selling goods in a foreign market at below their "fair" market price. A. monopolizing B. dumping C. slashing D. subsidizing 70. If China were to export vast quantities of cheap toys to India, selling them at below their costs of production, it would constitute: A. monopolism. B. dumping. C. slashing. D. safeguarding. 71. In the context of dumping, predatory behavior can be described as foreign producers: A. attempting hostile takeovers of domestic firms and usurping the available resources for production. B. indiscriminately exploiting the natural resources of a foreign country to create a later demand that can be met only by imports. C. eliminating competition by subsidizing prices in a foreign market with home market profits and eventually raising prices to earn substantial profits. D. buying goods of competing domestic firms and hoarding them to create an artificial demand, and exporting those goods at higher prices. 72. One of the motives for foreign firms engaged in dumping may be: A. unloading excess production in foreign markets. B. cutting labor costs to reduce the costs of production. C. offering a wider range of products for consumers in foreign markets. D. offering competitive pricing for goods that are not produced in foreign countries. 73. An alleged example of occurred in 1997, when two Korean manufacturers of semiconductors, LG Semicon and Hyundai Electronics, were accused of selling dynamic random access memory chips in the U.S. market at below their costs of production. A. dumping B. monopolizing C. slicing D. subsidizing 74. The two US agencies that deal with antidumping complaints are the: A. Economic Offences Wing and Conciliation Services. B. International Trade Commission and the Industry Council. C. Commerce Department and the International Trade Commission. D. Federal Trade Commission and the Economic Council. 75. Which of the following is considered to be the ultimate objective of antidumping policies? A. Protect consumers from competitive pricing B. Prevent domestic firms from unloading their excess production in domestic markets C. Protect domestic producers from unfair foreign competition D. Protect consumers from substandard and hazardous products 76. In general, what are the two paths of arguments for government intervention into the free flow of trade? A. Political and cultural B. Economic and legal C. Political and economic D. Legal and social 77. Furthering the goals of foreign policy and advancing the human rights of individuals in exporting countries are examples of issues covered by for government intervention. A. political arguments B. humanitarian arguments C. legal arguments D. economic arguments 78. arguments for government intervention into international trade are typically concerned with boosting the overall wealth of a nation. A. Economic B. Political C. Legal D. Commercial 79. Which of the following is perhaps the most common political argument for government intervention into the free flow of trade? A. Protecting national identity B. Protecting national sovereignty from being usurped by supranational organizations C. Protecting jobs and industries from unfair foreign competition D. Improving efficiency of domestic labor 80. At times, countries contend that it is necessary to protect industries such as those related to defense—aerospace, advanced electronics, and semiconductors—because these industries are important for: A. retaining innovation. B. national entrepreneurial spirit. C. national security. D. diplomatic reasons. 81. Some argue that governments should use the threat of to intervene in trade policy as a bargaining tool to help open foreign markets and force trading partners to "play by the rules of the game." A. free trade B. deregulation C. retaliation D. liberalization 82. Why is retaliation by government intervention a risky strategy? A. It may liberalize trade and bring with it resulting economic gains. B. A country that is being pressured may respond by raising trade barriers of its own. C. It may expose certain industries that are important for national security to foreign competition. D. It allows firms to sell goods in foreign market at below their fair market value. 83. In 2006, several countries of the European Union and U.S. banned imports of Mattel toys with high levels of lead, manufactured in China. The underlying motive for such a move could be: A. protecting domestic businesses from unfair pricing. B. protesting the pricing of toys below their costs of production. C. protecting consumers from unsafe products. D. increasing the trade surplus of the U.S. 84. Which of the following would be a likely action motivated by the desire of governments to protect their consumers from unsafe products? A. Placing tariffs on imports of foreign steel, by the Bush administration in 2002 B. Threatening 100 percent tariffs on a range of Chinese products violating intellectual property laws C. Outlawing importation, sale, or use of genetically modified organisms by Austria and Luxembourg D. Passing legislations such as the D'Amato Act and the Helms-Burton Act targeting products from Libya, Iran, and Cuba 85. Which of the following actions reflect the use of trade policies by governments to further their foreign policy objectives? A. Pressuring "rogue states" that do not abide by international law or norms B. Enforcing tougher intellectual property regulations C. Threatening high tariffs and quotas D. Limiting or banning imports of unsafe or substandard products 86. U.S. trade sanctions against Cuba, Libya, and Iran are examples of: A. governments protecting domestic consumers from unsafe products. B. governments using trade policy to support their foreign policy objectives. C. governments protecting local businesses from international competition. D. governments punishing foreign companies for dumping products in their markets. 87. Legislation that allows Americans to sue foreign firms that use property in Cuba confiscated from them after the 1959 revolution is known as the: A. Frederick-Peterson Act. B. D'Amato-Perkins Act. C. Perkins-Dole Act. D. Helms-Burton Act. 88. Which one of the following Acts represents U.S. legislation that is similar to the Helms- Burton Act, but is aimed at Libya and Iran? A. Perkin's Act B. D'Amato Act C. Williams Act D. Cato Act 89. status allows countries to export goods to the U.S. under favorable terms. A. Most favored nation B. Preferred trade partner C. Strategic ally D. Friendly state 90. China did not join the WTO until 2001, so historically the decision of whether to grant MFN status to China was a real one. The decision was made more difficult by the perception that China had a(n) . A. unskilled and unemployable population B. high-cost labor structure C. poor human rights record D. large population 91. Environmental organizations pushing for greater regulation of international trade argue that there is a strong relationship between and environmental pollution and degradation. A. dumping B. trade sanctions C. income levels D. factor endowments 92. Empirical evidence suggests the relationship between income levels and pollution is not a linear one—rather it is an inverted U-shaped relationship—implying that international trade, and the growth that results from it, may not be damaging to the environment. Important exceptions to this trend are: A. pollution levels evidenced in burgeoning economies like China and India. B. incidents like the Chernobyl disaster and Tokaimura nuclear accident. C. results revealing rise in carbon dioxide emissions with rise in income levels. D. frequent oil spills occurring in various seas across the world. 93. Which of the following is one of the reasons offered to explain the high levels of carbon dioxide emissions in developed countries like the U.S.? A. Richer societies are more energy intensive and use carbon dioxide rich hydrocarbons extensively. B. Developed countries tend to be more densely populated than other countries and hence reflect higher carbon dioxide emissions. C. Companies in developed countries are less likely to take up social responsibility initiatives than those in developing countries. D. Developed countries generally have environmental pollution regulations less stringent than those in developing countries. 94. If countries do not meet their targets for reducing carbon emissions specified in international treaties, they may find themselves the targets of . A. dumping B. inflation C. economic crisis D. retaliatory action 95. According to the text, which of the following factors is likely to be the least important in determining location decisions for businesses? A. Labor productivity B. Transportation costs C. Pollution abatement costs D. Access to technological know-how 96. With the development of the and , the economic arguments for government intervention have undergone a renaissance in recent years. A. technology; WTO B. free trade; democratic governments C. new trade theory; strategic trade policy D. democratic governments; anti-globalization movement 97. Which of the following is by far, the oldest economic argument for government intervention into the free flow of trade? A. Impoverished industry argument B. Infant industry argument C. Sick industry argument D. National security-related industry argument 98. According to , many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with well- established industries in developed countries. A. mercantilism B. comparative advantage theory C. product life-cycle theory D. infant industry argument 99. has recognized the infant industry argument as a legitimate reason for protectionism. A. GATT B. North Atlantic Treaty Organization C. United Nations D. International Monetary Fund 100. One of the main reasons why many economists remain critical of the infant industry argument is its assumption that: A. protection of manufacturing from foreign competition is harmful. B. absolute advantage cannot sustain productivity of an industry. C. foreign firms too come under the definition of infant industry when they newly enter a foreign market. D. firms are unable to make efficient long-term investments through domestic or international capital markets. 101. Protection of manufacturing from foreign competition does no good unless the protection: A. helps make the industry efficient. B. provides guaranteed employment for the citizens. C. affects the standards of living and per capita income of the people. D. promotes foreign direct investment. 102. Given financial support, firms based in countries with a potential comparative advantage have an incentive to endure the necessary initial losses in order to make long-run gains without requiring . A. good governance B. latest technology C. government protection D. regular monitoring 103. According to the text, given efficient global capital markets, the only industries that would require government protection would be: A. those that are not worthwhile. B. defense-related, such as aerospace and semiconductors. C. chemical and processing industries. D. those that require efficient administration. 104. A government should use subsidies to support promising firms that are active in newly emerging industries, according to the argument. A. strategic trade policy B. infant industry C. absolute advantage D. product life-cycle 105. According to the text, governments should target technologies that may be important in the future and use to support development work aimed at commercializing those technologies. A. subsidies B. sanctions C. factor endowments D. personnel 106. An important component of strategic trade policy is that it might pay governments to intervene in an industry if it helps domestic firms overcome the barriers to entry created by foreign firms that have already reaped . A. all available profits B. first-mover advantages C. comparative advantage D. foreign direct investment 107. To try and establish Airbus as a global competitor against Boeing, the governments of Britain, France, Germany, and Spain: A. threatened 100% tariffs on the import of Boeing aircraft. B. drafted legislations that required 25% of Boeing's aircraft by value to be manufactured in Europe. C. imposed import quotas on American-manufactured Boeing aircraft. D. pooled in subsidies worth $15 billion. 108. The strategic trade policy arguments of the new trade theorists challenge the rationale for unrestricted free trade found in the work of classic trade theorists. In response to this challenge to economic orthodoxy, a number of economists—including some of those responsible for the development of the new trade theory, such as Paul Krugman are: A. advocating a world-wide swing toward mixed economies. B. debunking assertions made by Adam Smith and David Ricardo. C. making a revised case for free trade. D. pointing out that in practice free trade may be unworkable. 109. According to Paul Krugman, a country that attempts to use strategic trade policy to establish a domestic firm in a dominant position in a global industry will probably: A. dominate the industry. B. move away from protectionism. C. provoke retaliation. D. incur huge financial debts. 110. According to Krugman, the ideal way for a country to respond when one's competitors are already being supported by government subsidies is probably not to engage in retaliatory action but to: A. help establish rules that minimize the use of trade-distorting subsidies. B. adopt the strategic trade policy as a way to establish domestic firms in a dominant position in the global industry. C. move to an industry where the competitors have not had the benefit of such strategic trade policies. D. use a combination of home-market protection and export-promoting subsidies. 111. According to Krugman, one of the reasons for not embracing strategic trade policy is that such a policy might: A. hamper the chances of a country's firms to effectively exploit first-mover advantages. B. be captured by special-interest groups within the economy for personal benefits. C. be used to establish rules of the game that minimize use of trade-distorting subsidies. D. divert attention from the need to establish domestic firms in a dominant position in the global industry. 112. Which of the following historical events signified the first official embracing of free trade as a government policy by Great Britain? A. The Union of the Crowns in 1603 B. The repeal of the Corn Laws by the British Parliament in 1846 C. The Treaty of American Independence in 1783 D. The Industrial Revolution of the 18th and 19th centuries 113. Which of the following represents the reason for the British Parliament repealing the Corn Laws in 1846? A. Opium wars that polarized world opinion against Great Britain B. Prospect of harvest failure in Britain and famine in Ireland C. Imminent threat of rebellions in most of its colonies D. Labor party taking over the government from the Liberal Conservatives 114. According to the text, the only reason Great Britain pushed the case for trade liberalization for as long as 80 years in the 19th century was that: A. it was starting to lose the military stranglehold over much of its colonies. B. the emergence of the U.S. threatened its position as the most industrialized nation. C. it stood to lose the most from a trade war. D. it had experienced severe famines and droughts in the earlier part of the 19th century. 115. The economically damaging effects of the Great Depression were worsened in 1929 by the . A. First World War B. U.S. stock market collapse C. spread of communism through Europe D. Cold War between the world's superpowers 116. Which one of the following aimed at avoiding rising unemployment by protecting domestic industry and diverting consumer demand away from foreign products, erected an enormous wall of tariff barriers? A. Smoot-Hawley Act B. D'Amato Act C. Helms-Burton Act D. Buy America Act 117. A particularly odd aspect of the Smoot-Hawley tariff-raising binge was that the United States was running a balance-of-payment surplus at the time and it was the world's largest nation. A. debtor B. free-trade C. importing D. creditor 118. Established under U.S. leadership in 1947, which of the following was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import quotas, and the like? A. General Agreement of Tariffs and Trade (GATT) B. North American Free Trade Agreement (NAFTA) C. Central American Free Trade Agreement (CAFTA) D. Free Trade Areas of the Americas (FTAA) 119. Which of the following statements regarding GATT is true? A. GATT attempted to liberalize trade restrictions in one go. B. In its early years, GATT was unsuccessful and hence was superseded by the WTO. C. GATT regulations failed as they were enforced by an unshared monitoring mechanism. D. Tariff reductions through negotiations were spread over eight rounds. 120. One of the reasons that protectionist pressures arose around the world during the 1980s was: A. that many countries found ways to get around GATT regulations. B. the opening up of national markets to cheap products from China. C. the fall of the Soviet Union. D. the persistent trade lead taken by the United States. 121. is one of the ways in which countries can circumvent GATT regulations and is exemplified by the agreement between Japan and America under which Japanese producers promised to limit their auto imports into the United States. A. Voluntary export restraint B. Import quota C. Specific tariff D. Quota rent 122. Bilateral voluntary export restraints, or VERs, circumvented GATT agreements, because: A. these nations withdrew their membership to the GATT. B. the member nations had ceased to recognize GATT as a regulatory body for international trade. C. VERs were not a recognized trade barrier under the GATT constitution. D. neither the importing country nor the exporting country complained to the GATT bureaucracy. 123. The main effect of the Uruguay Round Agreement on agricultural products was that: A. caps were imposed on textile exports. B. farm subsidies were reduced. C. tariffs on industrial goods were increased. D. a wide range of agricultural services were exempted from GATT rules. 124. All of the following were provisions of the Uruguay Round Agreement EXCEPT: A. clearer and stronger GATT rules. B. extension of GATT fair trade and market access rules to cover a wider range of services. C. substantial reduction in agricultural subsidies. D. increase in tariffs on industrial goods in lieu of the reduction in agricultural subsidies. 125. Which of the following has taken over responsibility to arbitrate trade disputes and monitor the trade policies of member countries and resulted because of the Uruguay Round agreement? A. World Bank B. World Trade Organization C. International Trade Commission D. International Monetary Fund 126. The WTO's Agreement on is an attempt to narrow the gaps in the way intellectual property rights are protected around the world and to bring them under common international rules. A. International Body on Intellectual Property (IBIP) B. Court of Arbitration of Intellectual Property (CAIP) C. Trade-Related Aspects of Intellectual Property Rights (TRIPS) D. Intellectual Property Rights Enforcement and Resolution (IPER) 127. Countries that have been found by the arbitration panel to violate GATT rules may appeal to of the World Trade Organization, but its verdict is binding. A. human rights commission B. permanent appellate body C. International Court of Justice D. Security Council 128. The millennium round of talks of WTO attempted to get the assembled countries to agree to work toward: A. agreeing on raising barriers to cross-border trade. B. strengthening their defense ties and carry on with their war against terror. C. reducing barriers to cross-border trade in agricultural products and trade and investment in services. D. increasing average tariff rates imposed by developing nations on manufactured goods to more than four percent of value, the highest level in modern history. 129. Two of the first industries targeted for reform by the WTO with a view to encompass regulations governing foreign direct investment were: A. global telecommunication and financial services industries. B. scientific research and defense sector. C. pharmaceuticals and heavy metal industry. D. agriculture and biotechnology. 130. Which of the following countries, with minor exceptions, is fully open to inward investment by foreign banks, insurance, and security companies? A. Russia B. Cuba C. Venezuela D. The United States 131. Human rights activists see WTO rules as the ability of nations to stop imports from countries where child labor is used or working conditions are hazardous. A. enabling B. outlawing C. supplementing D. facilitating 132. One of the loopholes in antidumping laws that is being exploited by many countries to pursue protectionism is the: A. toothlessness of the enforcement agencies. B. WTO's non-committal approach to antidumping laws. C. bilateral VERs which subvert antidumping laws. D. rather vague definition of what constitutes "dumping." 133. Which of the following is NOT true about agricultural subsidies? A. They clear distortions in the production and international trade of agricultural products. B. They encourage countries to overproduce heavily subsidized agricultural products. C. They reduce international trade in agricultural products. D. They raise the prices of agricultural products to consumers. 134. are the highest rate that can be charged, which is often, but not always, the rate that is charged. A. Ceiling rates B. Specific tariffs C. Bound tariff rates D. Ad maximum rates 135. Which of the following has been excluded from the agenda for the Doha round of WTO talks that began in 2001? A. Reducing barriers to cross-border investment B. Phasing out subsidies to agricultural producers C. Limiting the use of antidumping laws D. Attempts to tie trade to labor standards in a country 136. The threat of antidumping action limits the ability of a firm to: A. raise capital in the primary market. B. raise prices in response to high demand. C. disperse its productive activities in an efficient manner. D. use aggressive pricing to gain market share in a country. 137. According to the text, most economists would probably argue that the best interests of international business are served by a free trade stance, but not a stance. A. facilitating B. open market C. laissez-faire D. ad valorem Essay Questions 138. What is a tariff? Describe the difference between specific tariffs and ad valorem tariffs, illustrating each with an example. 139. Who gains and who loses from the imposition of a tariff on imported goods? How can it be determined whether the net gain from the tariff exceeds the net loss? 140. What is a subsidy? Provide some examples of the forms that subsidies take. How do subsidies help domestic producers? 141. What is a voluntary export restraint? Why do exporting countries agree to VERs? Explain with an example. 142. What is local content requirement? How can local content requirements typically be expressed? How have local content requirements been used as trade barriers? 143. What are the principle political arguments for government intervention into international trade? 144. Describe briefly, with examples, the use of trade policies by governments to support their foreign policy objectives. 145. What is the "infant industry argument"? What are its implications for the world economy? What are the criticisms of this argument? 146. Briefly describe the implications of the strategic trade policy as applied to international trade. 147. Give a brief description of the origin, functions, and successes of GATT from 1947 to 1979, before protectionist trends gained momentum across the world. 148. Describe how the world trade system erected by GATT came under strain from protectionist trends that dominated the world economy from 1980 to 1993. 149. State the provisions that were formed after the completion of the Uruguay Round of talks. 150. Explain the organizational structure of the WTO and mention the functions of its key organs. 151. Why is the WTO meeting in Seattle considered a watershed? 152. List the fours issues at the forefront of the current agenda of the WTO. Chapter 06 The Political Economy of International Trade Answer Key True / False Questions 1. (p. 205) Subsidies are a trade policy instrument. TRUE Trade policy uses seven main instruments: tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, and antidumping duties. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 2. (p. 205) Tariffs are the most complex instrument of trade policy. FALSE Tariffs are the oldest and simplest instrument of trade policy. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 3. (p. 205, 206) Tariffs are the instrument that the GATT and WTO have been most successful in limiting. TRUE Tariffs are the instrument of trade policy that GATT and WTO have been most successful in limiting. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 4. (p. 206) In recent decades, a fall in subsidies, quotas, and voluntary export restraints has been accompanied by a corresponding fall in nontariff barriers. FALSE A fall in tariff barriers in recent decades has been accompanied by a rise in nontariff barriers, such as subsidies, quotas, voluntary export restraints, and antidumping duties. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 06-01 Topic: Instruments of Trade Policy 5. (p. 206) Nontariff barriers include subsidies, quotas, voluntary export restraints, and antidumping duties. TRUE A fall in tariff barriers in recent decades has been accompanied by a rise in nontariff barriers, such as subsidies, quotas, voluntary export restraints, and antidumping duties. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 6. (p. 206) Specific tariffs are levied as a proportion of the value of the imported good. FALSE Specific tariffs are levied as a fixed charge for each unit of a good imported. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 7. (p. 206) Ad valorem tariffs reduce the cost of imported products relative to domestic products. FALSE Tariffs, specific and ad valorem, are placed on imports to protect domestic producers from foreign competition by raising the price of imported goods. AACSB: Reflective Thinking Bloom's: Remember Difficulty: Medium Learning Objective: 06-01 Topic: Instruments of Trade Policy 8. (p. 206) Tariffs are largely pro-producer and anti-consumer. TRUE Tariffs are pro-producer and anti-consumer. While they protect producers from foreign competitors, this restriction of supply also raises domestic prices. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 9. (p. 206) Tariffs increase the overall efficiency of the world economy because a protective tariff encourages domestic firms to produce products more efficiently at home that, in theory, could be produced abroad. FALSE Import tariffs reduce the overall efficiency of the world economy because a protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 10. (p. 207) Export tariffs are far less common than import tariffs. TRUE Sometimes tariffs are levied on exports of a product from a country. Export tariffs are far less common than import tariffs. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 11. (p. 207) The main gains from subsidies accrue to importers, whose international competitiveness is increased as a result of these subsidies. FALSE The main gains from subsidies accrue to domestic producers, whose international competitiveness is increased as a result. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 12. (p. 207) Japan has a long history of supporting inefficient domestic producers with farm subsidies. TRUE Agriculture tends to be one of the largest beneficiaries of subsidies in most countries. Japan has long history of supporting inefficient domestic producers with farm subsidies. Even the European Union and the U.S. are not exempt from this rule. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 13. (p. 208) A direct restriction on the quantity of some good that may be imported into a country is a quota rent. FALSE An import quota is a direct restriction on the quantity of some good that may be imported into a country. The restriction is usually enforced by issuing import licenses to a group of individuals or firms. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 14. (p. 209, 210) Quotas benefit consumers the most. FALSE As with all restrictions on trade, quotas do not benefit consumers. An import quota or voluntary export restraint always raises the domestic price of an imported good. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 15. (p. 210) The Buy America Act specifies that government agencies must give preference to American products when putting contracts for equipment out for bid unless the foreign products have a significant advantage. TRUE A little-known law in the United States, the Buy America Act, specifies that government agencies must give preference to American products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 16. (p. 210) Administrative trade policies are bureaucratic rules that are designed to make it easy for imports to enter a country. FALSE In addition to the formal instruments of trade policy, governments of all types sometimes use informal or administrative policies to restrict imports and boost exports. Administrative trade policies are bureaucratic rules designed to make it difficult for imports to enter a country. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 17. (p. 211) Dumping is variously defined as selling goods in a foreign market at below their costs of production, or as selling goods in a foreign market at below their "fair" market value. TRUE Dumping is defined as selling goods in a foreign market at below their costs of production or "fair" market value. Dumping is viewed as a method by which firms unload excess production in foreign markets. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 18. (p. 211) Antidumping policies are designed to punish foreign firms that engage in dumping industrial waste into the environment. FALSE Dumping is variously defined as selling goods in a foreign market at below their costs of production or as selling goods in a foreign market at below their "fair" market value. Antidumping policies are designed to punish foreign firms that engage in dumping and thus protect domestic producers from unfair foreign competition. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 19. (p. 211) The fair market value of a good is normally judged to be lesser than the costs of producing that good. FALSE The fair market value of a good is normally judged to be greater than the costs of producing that good as the former includes a "fair" profit margin. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 20. (p. 213) Countries sometimes argue that it is necessary to protect certain industries because they are important for national security. TRUE Countries sometimes argue that it is necessary to protect certain industries because they are important for national security. Defense-related industries often get this kind of attention (e.g., aerospace, advanced electronics, semiconductors, etc.). AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-02 Topic: The Case for Government Intervention 21. (p. 213) Protecting consumers from "dangerous" products and furthering the goals of foreign policy are types of economic arguments for intervention. FALSE Political arguments for government intervention cover a range of issues, including protecting consumers from "dangerous" products, furthering the goals of foreign policy. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 06-02 Topic: The Case for Government Intervention 22. (p. 217) The relationship between pollution and income levels follows a linear pattern. FALSE Empirical evidence suggests the relationship between income levels and pollution is not a linear one—rather it is an inverted U-shaped relationship. To begin with, as countries start to climb the ladder of economic progress, pollution levels do increase, but past some threshold, they start to decline. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Topic: The Case for Government Intervention 23. (p. 219) The infant industry argument is the oldest economic argument for government intervention. TRUE The infant industry argument is by far the oldest economic argument for government intervention. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-02 Topic: The Case for Government Intervention 24. (p. 219) Until the early 1980s, most economists saw little benefit in government intervention and strongly advocated a free trade policy. TRUE Until the early 1980s, most economists saw little benefit in government intervention and strongly advocated a free trade policy. This position has changed at the margins with the development of strategic trade policy, although there are still strong economic arguments for sticking to a free trade stance. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-02 Topic: The Case for Government Intervention 25. (p. 219) Brazil's auto industry, once the world's tenth-largest and built behind tariff barriers and quotas, has been proven as one of the world's most inefficient. TRUE Brazil built the world's tenth-largest auto industry behind tariff barriers and quotas. Once those barriers were removed in the late 1980s, however, foreign imports soared, and the industry was forced to face up to the fact that after 30 years of protection, Brazil had one of the world's most inefficient industry. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Topic: The Case for Government Intervention 26. (p. 219) Protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient. TRUE Protection of manufacturing from foreign competition does no good unless the protection helps make the industry efficient. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 06-02 Topic: The Case for Government Intervention 27. (p. 221) The roots of strategic trade policy arguments can be traced back to the late 18th century and the works of Adam Smith and David Ricardo. FALSE The strategic trade policy arguments of the new trade theorists suggest an economic justification for government intervention in international trade which challenges the rationale for unrestricted free trade found in the work of classic trade theorists such as Adam Smith and David Ricardo. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-03 Topic: The Revised Case for Free Trade 28. (p. 221) Several economists, including Paul Krugman, point out that although free trade policy looks appealing in theory, in practice it may be unworkable. FALSE In response to the challenge to economic orthodoxy posed by new trade theory, which argues for government intervention, a number of economists—including some of those responsible for the development of the new trade theory, such as Paul Krugman—point out that although strategic trade policy looks appealing in theory, in practice it may be unworkable. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 06-03 Topic: The Revised Case for Free Trade 29. (p. 223) The Smoot-Hawley Act was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, and import quotas. FALSE Aimed at avoiding rising unemployment by protecting domestic industries and diverting consumer demand away from foreign products, the Smoot-Hawley Act erected an enormous wall of tariff barriers. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-04 Topic: Development of the World Trading System 30. (p. 224) In the Uruguay Round of the WTO, member countries sought to exempt trade in services from GATT rules. FALSE Against the background of rising pressures for protectionism, in 1986 GATT members embarked on their eighth round of negotiations to reduce tariffs, the Uruguay Round. Until then, GATT rules had applied only to trade in manufactured goods and commodities. In the Uruguay Round, member countries sought to extend GATT rules to cover trade in services. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-04 Topic: Development of the World Trading System 31. (p. 227) The United States wanted the WTO to allow governments to impose tariffs on goods imported from countries that did not abide by what the United States saw as fair labor practices during a WTO meeting at the end of November 1999. TRUE During the Seattle round of WTO talks, the United States wanted the WTO to allow governments to impose tariffs on goods imported from countries that did not abide by what the United States saw as fair labor practices. Representatives from developing nations reacted angrily to this proposal, suggesting it was simply an attempt by the United States to find a legal way of restricting imports from poorer nations. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-04 Topic: Development of the World Trading System 32. (p. 228) Antidumping actions seem to be concentrated in certain sectors of the economy such as basic metal industries (e.g., aluminum and steel), chemicals, plastics, and machinery and electrical equipment. TRUE Antidumping actions seem to be concentrated in certain sectors of the economy such as basic metal industries (e.g., aluminum and steel), chemicals, plastics, and machinery and electrical equipment. These sectors account for some 70 percent of all antidumping actions reported to the WTO. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-04 Topic: Development of the World Trading System 33. (p. 230) The biggest defenders of agricultural subsidies are the developed nations of the world. TRUE The biggest defenders of agricultural subsidies have been the advanced nations of the world, which want to protect their agricultural sectors from competition by low-cost producers in developing nations. In contrast, developing nations have been pushing hard for reforms that would allow their producers greater access to the protected markets of the developed nations. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 06-04 Topic: Development of the World Trading System 34. (p. 230) Free trade in agriculture could help to jump-start economic growth among the world's poorer nations and alleviate global poverty. TRUE Estimates suggest that removing all subsidies on agricultural production alone in OECD countries could return to the developing nations of the world three times more than all the foreign aid they currently receive from the OECD nations. In other words, free trade in agriculture could help to jump-start economic growth among the world's poorer nations and alleviate global poverty. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-04 Topic: Development of the World Trading System 35. (p. 235) The threat of antidumping action enhances the ability of a firm to use aggressive pricing to gain market share in a country. FALSE The threat of antidumping action limits the ability of a firm to use aggressive pricing to gain market share in a country. Firms in a country also can make strategic use of antidumping measures to limit aggressive competition from low-cost foreign producers. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 06-05 Topic: Focus on Managerial Implications 36. (p. 236) Government intervention may invite retaliation and trigger a trade war. TRUE Government intervention can be self-defeating because it tends to protect the inefficient rather than help firms become efficient global competitors. Intervention is dangerous; it may invite retaliation and trigger a trade war. Intervention is unlikely to be well executed, given the opportunity for such a policy to be captured by special-interest groups. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-05 Topic: Focus on Managerial Implications Multiple Choice Questions 37. (p. 205) Which of the following is one of the seven main instruments utilized in trade policy? A. Local content requirements B. Licensing C. Foreign direct investment D. Employment guarantees Trade policy uses seven main instruments: tariffs, subsidies, import quotas, voluntary export restraints, local content requirements, administrative policies, and antidumping duties. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 38. (p. 206) While tariffs are levied as a fixed charge for each unit of a good imported, tariffs are levied as a proportion of the value of the imported good. A. ground; ceiling B. ad hoc; nonconvertible C. posited; floating D. specific; ad valorem Tariffs fall into two categories - specific tariffs are levied as a fixed charge for each unit of a good imported and ad valorem tariffs are levied as a proportion of the value of the imported good. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 39. (p. 206) Tariffs cause damage to because this group must pay more for certain imports. A. investors B. governments C. consumers D. producers Consumers stand to lose more due to tariffs than governments and domestic producers as they must pay more for certain imports. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 40. (p. 206) According to experts, which of the following groups most benefits from the imposition of tariffs? A. Government and producers B. Consumers and trade associations C. Exporters and importers D. Producers and foreign competitors Due to imposition of import tariffs, the government gains, because the tariff increases government revenues, and domestic producers gain, because the tariff affords them some protection against foreign competitors by increasing the cost of imported foreign goods. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 41. (p. 206) A protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad. This results in: A. an establishment of a comparative advantage over firms from other countries. B. improved productivity of the labor workforce in that country. C. higher mobility of resources within the country. D. an inefficient utilization of resources. Import tariffs reduce the overall efficiency of the world economy. They reduce efficiency because a protective tariff encourages domestic firms to produce products at home that, in theory, could be produced more efficiently abroad. The consequence is an inefficient utilization of resources. AACSB: Analytic Bloom's: Remember Difficulty: Medium Learning Objective: 06-01 Topic: Instruments of Trade Policy 42. (p. 206) The U.S. government imposed an eight to thirty percent tariff on steel imports into the United States in March 2002. This belongs to which of the following categories? A. General B. Ad valorem C. Specific D. Ad hoc Tariffs fall into two categories—specific tariffs are levied as a fixed charge for each unit of a good imported and ad valorem tariffs are levied as a proportion of the value of the imported good. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 06-01 Topic: Instruments of Trade Policy 43. (p. 206) Tariffs: A. reduce the price of foreign goods. B. reduce the overall efficiency of the world economy. C. help in efficient utilization of resources. D. are unambiguously pro-consumer and anti-producer. Tariffs are pro-producer and anti-consumer, increase the prices of imported goods, and reduce the overall efficiency of the world economy. AACSB: Reflective Thinking Bloom's: Understand Difficulty: Medium Learning Objective: 06-01 Topic: Instruments of Trade Policy 44. (p. 207) One of the objectives of export tariffs is to: A. improve the efficiency of utilization of resources. B. curb the competition offered by foreign firms to domestic firms. C. reduce exports from a sector, often for political reasons. D. maintain a positive trade deficit. Sometimes tariffs are levied on exports of a product from a country in order to raise revenue for the government and reduce exports from a sector, often for political reasons. For example, in 2004, China imposed a tariff on textile exports to moderate the growth in exports of textiles from China, thereby alleviating tensions with other trading partners. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 45. (p. 207) Which of the following is a government payment to a domestic producer? A. Duty B. Subsidy C. Quota D. Tariff A subsidy is a government payment to a domestic producer. Subsidies take many forms, including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 46. (p. 207) take many forms including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms. A. Ad valorem tariffs B. Subsidies C. Quota rents D. Specific tariffs A subsidy is a government payment to a domestic producer. Subsidies take many forms, including cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 47. (p. 207) By lowering production costs, subsidies help domestic producers in: A. gaining export markets. B. curtailing exports to other countries. C. meeting voluntary export restraints. D. regulating the quality of services they offer. By lowering production costs, subsidies help domestic producers in two ways: (1) competing against foreign imports and (2) gaining export markets. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 48. (p. 207) tend(s) to be one of the largest beneficiaries of subsidies in most countries. A. Banks B. Commercial airlines C. Agriculture D. Defense Agriculture tends to be one of the largest beneficiaries of subsidies in most countries. Developed countries like the U.S., the EU and Japan are not exempt from this rule either. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 49. (p. 207) By lowering production costs, help domestic producers compete against foreign imports. A. tariffs B. custom duties C. quotas D. subsidies By lowering production costs, subsidies help domestic producers in two ways: (1) competing against foreign imports and (2) gaining export markets. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 50. (p. 207) Governments typically pay for subsidies by: A. selling junk bonds. B. taxing individuals and corporations. C. foreign direct investment in poorer countries. D. privatization of public holdings. Government subsidies must be paid for, typically by taxing individuals and corporations. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 51. (p. 207) Advocates of believe that subsidies can help a firm achieve a first-mover advantage in an emerging industry. A. strategic trade policy B. free trade C. open market system D. justice theories Advocates of strategic trade policy favor subsidies to help domestic firms achieve a dominant position in those industries in which economies of scale are important and the world market is not large enough to profitably support more than a few firms. AACSB: Analytic Bloom's: Remember Difficulty: Easy Learning Objective: 06-01 Topic: Instruments of Trade Policy 52. (p. 207) Which of the following groups would most benefit from receiving subsidies? A. Governments B. Consumers C. Domestic producers D. Importers The main gains from subsidies accrue to domestic producers, whose international competitiveness is increased as a result. Advocates of strategic trade policy favor subsidies to help domestic firms achieve a dominant position in those industries in which economies of scale are important and the world market is not large enough to profitably support more than a few firms.