International Trade Policy Quiz

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Questions and Answers

Which model highlights the impact of productivity on trade patterns?

Ricardian model (correct)

Comparative advantage model

Heckscher-Ohlin model

Gravity model

What can be an outcome if countries prioritize protectionism without agreements?

Trade wars (correct)

Enhanced cooperation

Increased trade efficiency

Lower tariff rates

What is the significance of Nash Equilibrium in international trade negotiations?

It describes a situation where all agents respond optimally to each other’s strategies. (correct)

It emphasizes the importance of unilateral trade policies.

It ensures all agents are worse off.

It indicates a single best strategy for one party.

What role have international negotiations played since 1944 in the context of trade policy?

They have facilitated tariff reductions and other trade restrictions. Signup and view all the answers

Which trade policy instrument is primarily concerned with mutual tariff reductions?

Negotiated agreements Signup and view all the answers

What does the Gravity model of trade emphasize as determinants of trade patterns?

Inter-country size and distance Signup and view all the answers

What effect do negotiated agreements between countries typically have on trade?

They help avoid trade wars. Signup and view all the answers

From where can the modern internationally coordinated tariff reduction be traced back?

1930s Signup and view all the answers

What is the primary focus of the General Agreement on Tariffs and Trade?

Trade in goods Signup and view all the answers

Which agreement specifically addresses international property rights?

Agreement on Trade-Related Aspects of Intellectual Property Signup and view all the answers

What does the most favored nation (MFN) principle ensure under WTO agreements?

Countries pay tariffs no higher than the lowest paying nation Signup and view all the answers

What is a characteristic of a customs union?

Requirement for a common external trade policy Signup and view all the answers

How can a preferential trading agreement potentially decrease national welfare?

By replacing low-cost global imports with higher-cost imports from members Signup and view all the answers

Which of the following is an example of a free trade area?

USMCA Signup and view all the answers

What does the dispute settlement procedure in the WTO involve?

A formal procedure involving WTO expert panels Signup and view all the answers

Which of the following is a condition under which preferential trading agreements may not benefit national welfare?

When inexpensive imports from non-member countries are replaced Signup and view all the answers

What happens to the equilibrium price in the Home market when a tariff is imposed?

The price rises. Signup and view all the answers

How does a tariff impact the quantity of imports in the Home market?

Imports decrease. Signup and view all the answers

What is a direct effect of a tariff on the Foreign market?

The quantity of exports from Foreign decreases. Signup and view all the answers

In the context of tariff analysis, what is one primary benefit for Home producers?

Higher prices for their goods. Signup and view all the answers

What happens to Foreign's price when a small country imposes a tariff?

Foreign's price remains unchanged. Signup and view all the answers

Which of the following is a consequence of a tariff for consumers in the Home market?

Decreased access to foreign goods. Signup and view all the answers

What is a primary source of revenue generated by tariffs for the government?

Tariff fees collected on imported goods. Signup and view all the answers

How are the effects of a tariff characterized regarding consumer surplus?

Consumer surplus decreases as prices rise. Signup and view all the answers

What is trade creation?

Replacing high-cost domestic production with low-cost imports from member nations. Signup and view all the answers

What is a specific tariff?

A fixed charge per unit of imported goods. Signup and view all the answers

How does a tariff affect the willingness of sellers to ship goods?

It makes sellers unwilling to ship unless the Home price exceeds Foreign price by the tariff amount. Signup and view all the answers

What influence does an import demand curve have?

It is the disparity between Home consumer demand and Home producer supply. Signup and view all the answers

What does the export supply curve measure?

The amount of goods that Foreign producers supply minus what Foreign consumers demand. Signup and view all the answers

During tariff analysis, how do prices and quantities behave in Home?

Prices increase and quantities decrease. Signup and view all the answers

Which of the following is NOT an objective of a tariff?

Encouraging foreign exports. Signup and view all the answers

What does equilibrium in trade imply?

Import demand equals export supply. Signup and view all the answers

What does consumer surplus measure in the context of purchases?

The difference between the price paid and the maximum price consumers are willing to pay Signup and view all the answers

How does an increase in price generally affect consumer surplus?

Consumer surplus decreases Signup and view all the answers

What happens to producer surplus when the price of a product increases?

Producer surplus increases Signup and view all the answers

What does the rectangle 'e' represent in tariff analysis?

Government revenue gains from tariffs Signup and view all the answers

What is a possible impact of tariffs on national welfare for a large country?

The impact on national welfare is ambiguous Signup and view all the answers

What are non-tariff barriers mentioned in tariff analysis?

Import quotas, export subsidies, and technical barriers Signup and view all the answers

What is the purpose of anti-dumping tariffs?

To protect local industries by taxing imported goods priced below fair market value Signup and view all the answers

How do tariffs affect both consumers and foreign countries according to the analysis?

Tariffs cause government gains while negatively impacting consumers and foreign countries Signup and view all the answers

What was the approximate annual cost increase for U.S. households due to higher import prices resulting from tariffs?

$300-900 Signup and view all the answers

How did the new tariffs affect U.S. agricultural exports?

They covered virtually all U.S. agricultural exports. Signup and view all the answers

What is one of the benefits of free trade regarding resource allocation?

Free trade allows for better resource allocation. Signup and view all the answers

What is one dynamic benefit attributed to free trade?

Greater opportunities for innovation. Signup and view all the answers

What was a common response from major trading partners to U.S. tariffs?

Implementation of retaliatory tariffs. Signup and view all the answers

What is a consequence of tariffs as highlighted in the cost-benefit analysis?

They distort producer and consumer incentives. Signup and view all the answers

Study Notes

Economic Environment Analysis - Lecture 4

Trade is a significant and growing economic phenomenon.
Trade patterns are influenced by factors like size and distance (gravity model), productivity (Ricardian model), and resource availability (Heckscher-Ohlin model).
Trade often results in both winners and losers.

This Week's Topics

Brief history of the global trade system
Overview of trade policy instruments
Analysis of free trade's advantages and disadvantages

The Issue in a Nutshell (Trade Wars)

Negotiated agreements can prevent trade wars.
A trade war occurs when each country independently seeks protection, regardless of other countries' actions.
Without an agreement, all countries can enact trade restrictions, even if free trade benefits everyone.
Agreements are needed to prevent or resolve trade wars.
Example: During trade negotiations, the U.S. agreed to refrain from imposing quotas on Japanese goods in exchange for Japan removing barriers against U.S. agricultural and technological products.

The Issue in a Nutshell (Game Theory)

Game theory helps understand the actions of economic agents based on their constraints and beliefs about others' actions.
Agents interact strategically.
Nash Equilibrium: A situation where everyone is making the best possible decision, given the decisions of others.

The Issue in a Nutshell (Country Example)

In a hypothetical example, countries individually benefit from protectionism (20 > 10), but a collective agreement on free trade is more beneficial than protectionism (10 > -5).
Binding agreements can encourage free trade and benefit both parties.

International Negotiations

International negotiations involve governments agreeing to mutually reduce tariffs.
Each government reduces tariffs on goods imported from the other country.
Negotiated agreements can prevent trade wars resulting from unfavorable actions.

The U.S. Tariff Rate

After sharply rising in the early 1930s, the average U.S. tariff rate has steadily declined since 1938.
Much of the reduction in tariffs and trade restrictions followed international negotiations starting in 1944.

International Negotiations (Smoot-Hawley Act)

The Smoot-Hawley Act of 1930 significantly increased U.S. tariffs, leading to a substantial decline in U.S. trade.
Retaliatory responses from other countries followed, resulting in a decline in global trade.

International Negotiations (Reciprocal Trade Agreement Act)

In 1934, the Reciprocal Trade Agreement Act was introduced to mitigate the negative effects of the large increase in tariffs by bilateral negotiations.
The act's intent was to counter the effects of the large rise in tariffs.

International Negotiations (WTO and GATT)

The GATT (General Agreement on Tariffs and Trade) was formed in 1947 to facilitate international trade negotiations.
The WTO (World Trade Organization) was established in 1995 to implement and enforce multilateral trade agreements.

The World Trade Organization (WTO)

The WTO aims to promote open trade benefiting all members.
164 members, with 117 being developing countries.
Based in Geneva, Switzerland, with a budget of approximately CHF 200 million (approx. 211 million EUR).
Decision-making involves member governments (ministers or ambassadors).

The WTO (Negotiations)

WTO negotiations focus on reducing trade restrictions.
Binding tariff rates prevent increases to tariffs in the future (for an imposed tariff).
Eliminate nontariff barriers, such as quotas and export subsidies, replaced by tariffs for greater clarity and negotiation.
The "most favored nation" (MFN) principle ensures that all countries receive the lowest tariff rates.
Exceptions to the MFN principle can be made if the lowest tariff is set at zero.
The WTO deals with trade in goods, services (insurance, consulting, legal, banking), and intellectual property (patents, copyrights).

The WTO (Dispute Settlement)

The WTO has a formal dispute settlement procedure allowing countries in disagreements about trade agreements to bring their case to a panel of experts.
The panel decides whether members are adhering to agreements.
Countries that do not comply can face trade restrictions from other WTO members.

Preferential Trading Agreements (PTAs)

PTAs are trade agreements between countries giving preferential treatment to each other while not necessarily doing so for the rest of the world.
PTAs are often not allowed under WTO rules.
Most favored nation (MFN) principle permits exception only if the lowest tariff is zero.
Two types of PTAs:
Free Trade Area: Countries have free trade among themselves and independent trade policies with non-members
Example: USMCA (US-Mexico-Canada Agreement)
Customs Union: Countries have free trade among themselves and common trade policies toward non-members.
Example: The European Union
PTAs may decrease national welfare when diverting trade from the outside world to FTA/CU members.
Trade creation: Replacing high-cost domestic producers with low-cost imports from other members.
Trade diversion: Replacing low-cost imports from non-members with high-cost imports from members.

Instruments of Trade Policy

Tariffs are taxes imposed on imported goods.
Specific tariffs: fixed charge per unit of good (e.g., $3/barrel oil)
Ad valorem tariffs: percentage of the good's value (e.g., 25% on trucks)
Tariffs are a major source of income in pre-modern taxation systems and in developing countries.
Tariffs are designed to protect domestic industries by increasing the price of foreign goods (e.g., British Corn laws).
Tariffs can also be used to protect infant industries.

Tariff Analysis

Tariffs affect prices and quantities in domestic and foreign markets.
An import demand curve shows the difference between the quantity of a good demanded by domestic consumers and the quantity supplied by domestic producers at various prices.
An export supply curve shows the difference between domestic producers' supply amount and the amount foreign consumers buy at various prices..
In equilibrium, import demand equals export supply (world demand = world supply), and domestic demand + foreign demand equals domestic supply + foreign supply.

Tariff Analysis (Small Country)

In a "small" country, the tariff placed on products has little effect on the world price.
Price in importing country rises by full amount of tariff imposed.
The price in the exporting country does not fall at all.

Tariff Analysis (Summary)

Tariffs reduce the overall quantity of exchanged goods, compared to the unrestricted market.
The rise in price in the importing country can be less than the tariff amount.
Other countries' exports to the importing country may decline in response to the import tariff.
Prices in both countries lie between the autarky price of the importing country and the free-trade price
Exporters often decrease the price of goods they sell to absorb a portion of the tariff.

Costs and Benefits of Tariffs (Consumer Surplus)

Consumer surplus represents the difference between maximum amount that consumers would pay and the amount they actually pay for the good demanded.
Consumers experience a loss of consumer surplus as prices increase.

Costs and Benefits of Tariffs (Producer Surplus)

Producer surplus is the difference between the minimum amount that producers will accept to sell their goods/services and what they actually get.
When prices increase, producers' surplus rises.

Costs and Benefits of Tariffs

Tariffs damage consumers as they pay more for goods, while producers benefit from the higher prices.
The government reaps revenue through tariffs.
The overall welfare effect of a tariff is ambiguous (may increase or decrease depending on terms of trade gains vs. efficiency losses).
Foreign countries may retaliate.

The Trump Trade War

The Trump administration increased tariffs on specific goods and partners.
This led to retaliatory tariffs from other countries, impacting various goods and industries.
Tariffs significantly affected U.S. consumers (higher prices) and U.S. firms.

Free Trade: Good or Bad?

Free trade is efficient, allocating resources more effectively.
Tariffs interfere with producers' and consumers' incentives, potentially leading to higher prices and reduced welfare.
Free trade encourages economies of scale and competition, potentially reducing costs and improving quality of goods/services.
Free trade can encourage innovation because businesses have incentives to look for new ways to export or compete with imports.

The Case Against Free Trade

For larger countries, tariffs may reduce global prices, leading to a gain in trade terms for the importing country.
Optimal import tariffs may exist (probably low).
Retaliatory trade measures are possible.
Domestic market failures, such as unemployment and low wages, can arise from free trade.
Other factors, like lack of environmental protection or property rights, may also negatively affect countries using free trade.

Summary (International Trade)

International negotiations are crucial to avoid trade wars.
The WTO has played a significant role in reducing tariffs over the past 50 years.
Tariffs may cause efficiency losses, but sometimes the resulting trade gain can outweigh the losses.
The Trump trade war led to significant welfare losses for the U.S.

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Description

Test your knowledge on essential concepts of international trade policy, focusing on productivity impacts, protectionism, and trade agreements. This quiz also covers models such as the Gravity model and discusses the significance of Nash Equilibrium in trade negotiations. Explore the historical context of trade policies since 1944.