Protectionism and Trade Policy Quiz

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Questions and Answers

What is the primary reason some countries are against free trade?

Desire to maintain domestic employment (correct)

Concern for increases in import quality

Fear of losing international markets

The belief that imports are less expensive

What does protectionism aim to achieve?

Promote international cooperation

Support domestic industry (correct)

Facilitate free trade agreements

Enhance global competition

Which argument for protectionism relates to the necessity of nurturing new industries?

Reducing unemployment

Ensuring national security

Retaliation against unfair competition

Protecting infant industries (correct)

How might protectionist policies affect overall employment in a country?

They are believed to create more demand for local goods Signup and view all the answers

What reason do protectionists often give for requiring a nation to be self-sufficient?

To ensure national security Signup and view all the answers

Which of the following is NOT typically cited as a rationale for protectionism?

Encouragement of free trade Signup and view all the answers

What was a major outcome of the U.S.-China trade war concerning protectionism?

Imposition of stricter trade restrictions as retaliation Signup and view all the answers

What is a significant trend observed regarding protectionism in recent years?

It has gained traction again Signup and view all the answers

What is one of the main arguments against international trade made by trade unions and protectionists?

It leads to increased foreign wealth. Signup and view all the answers

Which of the following is considered a traditional method used by protectionist countries to restrict trade?

Tariffs. Signup and view all the answers

What is the purpose of import quotas?

To increase the price of imported goods. Signup and view all the answers

How does government impose tariffs affect consumer behavior?

It encourages consumers to buy domestic goods. Signup and view all the answers

What is the effect of subsidies on domestic producers?

It allows them to offer lower prices than foreign competitors. Signup and view all the answers

What type of government action involves restricting the inflow of Foreign Direct Investment (FDI)?

Investment restrictions. Signup and view all the answers

Why might governments oppose international trade?

It can distort local market conditions. Signup and view all the answers

Which of the following describes tariffs?

They are taxes on foreign imports. Signup and view all the answers

What is licensing primarily defined as?

A method of foreign operation allowing use of resources provided by the licensor Signup and view all the answers

Which of the following is an example of a company that utilizes licensing?

Coca Cola Signup and view all the answers

Which statement about joint ventures is true?

They involve multiple investors sharing ownership and control. Signup and view all the answers

What is the purpose of a management contract?

To outsource operational control to a more efficient firm Signup and view all the answers

What does a turnkey project typically involve?

Constructing facilities and training personnel Signup and view all the answers

Which of the following describes Greenfield Investment (GI)?

Establishing new operations in a foreign country from scratch Signup and view all the answers

What is a requirement for certain industries in China before they can sell goods?

They must source materials locally. Signup and view all the answers

What is a characteristic of international acquisition?

Acquisitions can include buying parts or entire companies. Signup and view all the answers

What is the primary cost associated with licensing?

Signing the agreement and enforcing it Signup and view all the answers

Which industry in India is completely banned from foreign direct investment (FDI)?

Real estate Signup and view all the answers

How does protectionism affect the economy in the long run?

It may protect certain jobs but is harmful for the economy overall. Signup and view all the answers

What is the primary characteristic of exporting as a market entry strategy?

It allows firms to market goods produced in their home country. Signup and view all the answers

Why might consumers benefit from lower prices due to imports?

It allows spending to shift to other markets, stimulating employment. Signup and view all the answers

What is one of the strategies regarding regulations for importing goods?

Import licenses may be restricted by the government. Signup and view all the answers

What does the term 'exchange rate controls' refer to?

Dictating the cost of imports by managing currency values. Signup and view all the answers

What is a consequence of implementing protectionist policies?

Job protection in the local market. Signup and view all the answers

Study Notes

Chapter 2: Import/Export Trade Distortions and Marketing Barriers

Countries generally don't mind exporting, but dislike imports.
A survey of over 28,000 people in 23 countries shows that even well-educated workers in poorer countries oppose free trade.
Workers in industries facing foreign competition also tend to oppose free trade, whereas well-educated people in developed countries tend to favor it.

Protectionism

Protectionism is the restriction of international trade to benefit domestic industries.
Protectionism has lessened after the creation of the World Trade Organization, but is gaining traction again.
The argument for protectionist measures, focusing on protecting infant industries, seems most credible.
Industries need protection until they become competitive, like South Korea's selective protection of infant export industries.
Protectionism may also be used to reduce unemployment or protect jobs. Import reduction is assumed to increase demand for local products and subsequently create jobs.
Protectionism can be used to protect consumers by banning products with pesticides and herbicides.
Protectionist policies can be used in retaliation (like the US-China trade war) due to other nations' protectionist policies.
Protectionism may also be used to promote national security, where nations are argued to be self-sufficient, even if it means paying for inefficiency.
Trade unions and protectionists often argue that international trade leads to money outflow and makes foreigners richer.

Government's Contribution to Protectionism

Governments are a significant source of trade distortions.
Even without tariffs or attempts to interfere, a government's mere existence can cause trade distortions.
Different policies and objectives of varying governments cause varying sales and income tax rates, leading to different economic settings internationally.
Historically, protectionist nations relied on tariffs, quotas, and restrictions on imported goods.
Modern protectionism involves tools like exchange controls, currency manipulation, and restrictions on Foreign Direct Investment (FDI).

Tariffs and Import Quotas

Tariffs are taxes on foreign goods, targeting specific countries or industries, or applied more broadly.
Tariffs aim to increase the prices of imports, encouraging consumers to buy cheaper domestically produced goods.
Import quotas (non-tariff trade barriers) restrict the volume of imports over a period.
Import quotas increase prices and decrease demand for those goods.

Subsidies

Subsidies are tax credits given to domestic producers by governments.
Subsidies cause differences in prices between producers and consumers, primarily to benefit the domestic firm.

Restrictions on FDI

Some governments restrict Foreign Direct Investment (FDI) to prevent foreign nations from entering their markets.
For example, China requires some industries to partner with local suppliers and India limits investments in some industries.

Regulations and Import Licensing

Regulations are policies and guidelines governments implement for imported goods and services.
Import licensing allows the government to restrict licenses for importers instead of relying only on policies related to international trade.

Protectionism and the Economy

Protectionism is generally not beneficial for the economy in the long run.
It increases consumer and business costs.
Temporary employment protections can be offset by reduced consumer spending and possible redirection of employment to other sectors.
Overall, cheaper imports stimulate other economic sectors in the long run.

International Trade Strategies

Strategies like exporting, licensing, joint ventures, turnkey operations, international acquisitions, and Greenfield investments facilitate overseas market entry.
Exporting is the traditional and cost-effective method for operating in foreign markets, focused on marketing goods.
Licensing is akin to franchising, where one party grants rights to use processes and trademark.
Joint ventures involve shared ownership to control operations and property rights.
Turnkey Operations entail paying contractors for facility design and constructions, allowing a foreign country to enter markets with its production process.
International Acquisitions means buying entire companies or parts for certain ownership and control.
Greenfield Investment involves establishing a new company in a new country from the ground up, offering the highest degree of control.

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Description

Test your knowledge on protectionism and its implications in international trade. This quiz covers the reasons for protectionist policies, their effects on employment, and major trends in trade relations. Explore the arguments for and against free trade and discover how tariffs, subsidies, and quotas play a role in economic strategies.