International Trade Policies

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Questions and Answers

What is the main purpose of anti-dumping duties?

To protect domestic industries from unfairly low-priced imports (correct)

To impose tariffs on all foreign imports

To increase consumer surplus in the domestic market

To reduce export subsidies for domestic producers

Which of the following best describes countervailing duties?

Duties imposed on all imports regardless of pricing

Tariffs aimed at offsetting foreign export subsidies (correct)

Import restrictions based on quantity only

Measures to reduce domestic employment rates

Which of the following is NOT an effect of tariffs?

Protection of domestic industries

Increased government revenue

Reduced imports

Increased consumer surplus (correct)

What are technical measures in non-tariff measures primarily concerned with?

Establishing product-specific regulations and standards Signup and view all the answers

Non-technical measures include all of the following EXCEPT:

Sanitary measures Signup and view all the answers

Which of the following is an example of a procedural obstacle in international trade?

Administrative issues related to documentation Signup and view all the answers

Which measure specifically aims to protect human, animal, and plant health?

Sanitary and phytosanitary (SPS) measures Signup and view all the answers

Which of the following characterizes hard measures in non-tariff measures?

Controls based on price and quality Signup and view all the answers

What was one reason for the loss of relevance of the GATT in the 1980s?

It became obsolete due to globalization. Signup and view all the answers

When was the WTO officially established?

January 1, 1995 Signup and view all the answers

Which round of negotiations laid the foundation for the establishment of the WTO?

Uruguay Round Signup and view all the answers

What was a significant issue with the GATT's structure during its operation?

It lacked adequate dispute settlement mechanisms. Signup and view all the answers

What did the WTO replace?

The GATT Signup and view all the answers

What aspect of global trade did the GATT primarily regulate?

International trade in goods Signup and view all the answers

How many subjects did the Goods Council under GATT involve?

10 Signup and view all the answers

What was a key challenge faced by GATT in the 1980s regarding agricultural trade?

Ineffective negotiation outcomes. Signup and view all the answers

What is the primary purpose of government procurement policies that include local content requirements?

To promote domestic sourcing in industries such as automotive Signup and view all the answers

Which of the following best defines a binding quota?

A quota typically set below the level of imports allowed under free trade Signup and view all the answers

What type of measures are imposed to restrict imports temporarily due to injury to domestic industries?

Safeguard measures Signup and view all the answers

Which of these is NOT typically included under export-related measures?

Seasonal quotas Signup and view all the answers

What is the main significance of rules of origin in international trade?

They help determine the national source of a product Signup and view all the answers

What distinguishes absolute quotas from non-binding quotas?

Absolute quotas are set permanently, while non-binding quotas may exceed import levels Signup and view all the answers

Which type of restriction involves a complete ban on importing or exporting specific goods?

Embargos Signup and view all the answers

What impact do administrative procedures have on imports?

They can create barriers due to high costs and long processing times Signup and view all the answers

What is the primary characteristic of a fixed exchange rate system?

It is set by government policy. Signup and view all the answers

In which exchange rate system is the government most likely to intervene to control the currency value?

Managed float system Signup and view all the answers

Which of the following is a disadvantage of a free-floating exchange rate system?

It can lead to unpredictability in exchange rates. Signup and view all the answers

What occurs during the process of devaluation in an exchange rate context?

The value of domestic currency is reduced compared to foreign currency. Signup and view all the answers

Which factor does NOT typically influence foreign exchange rates in a managed float system?

Pure unfettered supply and demand Signup and view all the answers

What is a commonly cited benefit of fixed exchange rate systems?

Greater stability and predictability in trade. Signup and view all the answers

How does speculation affect currency values in a free-floating exchange rate system?

It encourages volatility and unpredictability in currency values. Signup and view all the answers

What describes an outcome of government intervention in a managed float system?

Modification of currency value to stabilize the economy. Signup and view all the answers

What is the primary function of the nominal exchange rate?

To find the domestic price of foreign goods. Signup and view all the answers

Which type of foreign capital involves direct control of real assets in the home country?

Foreign Direct Investment (FDI) Signup and view all the answers

What is the consequence of a currency depreciation on a country's economy?

Growth of the domestic economy. Signup and view all the answers

Which type of foreign investment is characterized by purchasing and indirect control of a domestic business?

Foreign Portfolio Investment (FPI) Signup and view all the answers

How is the real effective exchange rate (REER) calculated?

Nominal effective exchange rate divided by foreign price index. Signup and view all the answers

What determines the nominal exchange rate in the market?

The point where the demand for foreign exchange equals its supply. Signup and view all the answers

What is vertical investment in the context of foreign direct investment?

Investment in different stages of production within the same industry. Signup and view all the answers

What role does the foreign exchange market play?

It facilitates the buying and selling of foreign exchange for current and future transactions. Signup and view all the answers

Study Notes

Anti-Dumping Duties

Domestic governments impose these tariffs on imports that they believe are priced below fair market value.

Countervailing Duties

Tariffs designed to offset artificially low prices charged by exporters who receive export subsidies and tax concessions from their home governments.

Effects of Tariffs

Create obstacles to international trade.
Reduce imports and consumer surplus.
Protect domestic industries and increase producer surplus.
Increase employment, income, and government revenue.

Non-Tariff Measures (NTMs)

Policy measures beyond ordinary customs tariffs that can impact international trade.
Can alter quantities traded, prices, or both.

NTM Categories

Technical Measures: Focus on product-specific characteristics.
Non-Technical Measures: Relate to trade requirements.

Further Classification of NTMs

Hard Measures: Examples include price and quality control measures.
Threat Measures: Cover anti-dumping and safeguard measures.
Investment Measures: Involve finance and investment restrictions.
Other Measures: Encompass trade-related, transportation, testing, and procedural obstacles.

Technical Measures:

Sanitary and Phytosanitary (SPS) Measures: Protect human, animal, plant, and biodiversity.
Technical Barriers to Trade (TBT): Mandatory standards and technical regulations.

Non-Technical Measures:

Import Quotas: Quantitative restrictions on imported goods.
Price Control Measures: Increase the cost of imports by a fixed percentage or amount.
Non-Automatic Licensing and Prohibitions: Imports may require discretionary licensing.
Financial Measures: Regulations related to payments, terms of payment, and foreign exchange.
Measures Affecting Competition: Granting exclusive privileges to economic operators.
Government Procurement Policies: Rules on local content requirements (e.g., 25% of automobile components sourced domestically).
Distribution Restrictions: Limitations on the distribution of goods in the importing country.
Restrictions on Post-Sales Services: Restrictions on providing after-sales services for exported goods.
Administrative Procedures: Costly and time-consuming administrative procedures for imports.
Rules of Origin: Criteria used by importing governments to determine the national source of a product.
Safeguard Measures: Temporary restrictions on imports to protect domestic industries from injury.
Embargos: Bans on imports and exports of specific commodities.

Forms of Import Quotas

Binding Quota: Set below the free trade level of imports, often requiring licenses.
Non-Binding Quota: Set at or above the free trade level of imports.
Absolute Quotas: Permanent quotas that limit the quantity of imports.
Seasonal/Tariff-Rate Quotas: Temporary quotas with country allocations.

Ban on Exports: Complete prohibition of exporting specific goods.
Export Taxes: Taxes on exported commodities.
Export Subsidies: Measures to promote exports.

The General Agreement on Tariffs and Trade (GATT)

Agreement signed in 1947 to regulate trade among 153 countries.
Focuses on international trade in goods.
Aims to reduce tariffs and other trade barriers.

GATT Committees

Member countries dealing with specific trade subjects.
Report to the Goods Council.

The 1980s and GATT

GATT lost relevance due to:
- Fast-evolving global trade scenario.
- Obsolete in handling the complexity of modern trade.
- Unsuccessful efforts to liberalize agricultural trade.
- Inability to address ambiguities in the multilateral system.
- Weaknesses in institutional structure and dispute settlement mechanisms.

The Establishment of the World Trade Organization (WTO)

The Uruguay Round laid the foundation for the WTO.
Agreement signed in December 1993 by most countries.
Took effect on January 1, 1995, replacing GATT.

WTO (World Trade Organization)

International organization dealing with the rules of trade between nations.
WTO agreements are negotiated and signed by countries.

Quotation/Indirect Method

A method of determining the value of a currency.
Determines the number of units of a foreign currency that can be exchanged for one unit of the local currency.

Foreign Exchange Rate

The price of a foreign currency in terms of the domestic currency.

Methods to Determine Exchange Rates

Fixed Exchange Rate System: Exchange rates set by government policy.
Free-Floating Exchange Rate System: Exchange rates determined by the forces of demand and supply of foreign currency.
Managed Float System: Government and central bank intervention in the exchange rate market to influence exchange rates.

Types of Exchange Rates

Nominal Exchange Rate: Used to determine the domestic price of foreign goods.
Real Exchange Rate: Adjusts the nominal exchange rate for price differences between currencies.
Real Effective Exchange Rate (REER): Measures the price competitiveness of a country's goods and services relative to its trading partners.

Foreign Exchange Market

A network of banks, brokers, and foreign exchange dealers that buy and sell foreign currencies.
Handles current and future transactions.

Determination of Nominal Exchange Rate

The exchange rate settles at the point where the demand for foreign currency equals the supply of foreign currency.

Impacts of Exchange Rate Fluctuations on Domestic Economy

Currency Depreciation:
- Increases exports and decreases imports.
- Can boost domestic economic growth.
- Increases foreign debt burden.
Currency Appreciation:
- Decreases exports and increases imports.
- Can slow domestic economic growth.
- Decreases foreign debt burden.

Foreign Capital

Inflows of capital from abroad into a country.
Components include foreign aid, borrowing, deposits from non-resident Indians, foreign direct investment, and foreign portfolio investment.

Types of Foreign Capital

Foreign Direct Investment (FDI): Purchase and direct control of real assets in a country by foreign investors.
- Vertical Investment: Investment in a different business activity that complements the investor's existing major business activity.
- Conglomerate Investment: Investment in a business operation unrelated to the investor's existing business activity.
- Horizontal Investment: Investment in the same business activity as the investor's existing business activity.
Foreign Portfolio Investment (FPI): Purchase and indirect control of assets in a country by foreign investors.

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Description

This quiz covers critical aspects of international trade policies, including anti-dumping and countervailing duties, and their effects on trade. It also addresses non-tariff measures and their classifications. Test your understanding of how these policies impact global markets.