CHAPTER 8

Trade Nontariff Barriers to Imports

 

Multiple Choice Questions

1.      The imposition of a domestic content requirement by the United States would cause consumer surplus for Americans to:

a.     Rise

b.     Fall

c.     Remain unchanged

d.     None of the above

ANSWER:       B

2.        Which of the following refers to a market-sharing pact negotiated by trading partners to moderate the intensity of international competition?

a.   Orderly marketing agreement

b.   Local content requirements

c.   Import quota

d.   Trigger price mechanism

ANSWER:         A

3.       Suppose the United States and Japan enter into a voluntary export agreement in which Japan imposes an export quota on its automakers. The largest share of the export quota’s “revenue effect” would tend to be captured by:

a.   The U.S. government

b.   Japanese automakers

c.   American auto consumers

d.   American autoworkers

ANSWER:         B

 

4.         Which of the following is a means of allocating import licenses by assigning the licenses without competition, applications, or negotiation?

a.   resource-using application procedures

b.   import-license auction

c.   fixed favoritism

d.   domestic content requirement

            ANSWER:       D

5.      Suppose the government grants a subsidy to domestic producers of an import-competing good. The subsidy tends to result in deadweight losses for the domestic economy in the form of the:

a.     Consumption effect

b.     Redistribution effect

c.     Revenue effect

d.     Protective effect

ANSWER:     B

 

6.         Which of the following allocates import licenses on a first-come, first-served basis; on the basis of need or worthiness; or on the basis of negotiations?

a.   resource-using application procedures

b.   import-license auction

c.   fixed favoritism

d.   domestic content requirement

            ANSWER:       A

 

7.         Which of the following mandates that a product produced and sold in a country must have a specified minimum amount of domestic production value?

a.   import quota

b.   mixing requirement

c.   voluntary export restraint

d.   domestic content requirement

            ANSWER:       D

 

8.         Which of the following requires that an import distributor buy a certain percentage of the product locally?

a.   import quota

b.   mixing requirement

c.   voluntary export restraint

d.   domestic content requirement

            ANSWER:       B

 

Figure 8.1 illustrates the steel market for Mexico, assumed to be a “small” country that is unable to affect the world price. Suppose the world price of steel is given and constant at $200 per ton. Now suppose the Mexican steel industry is able to obtain trade protection, as discussed in the questions below. Answer the next 7 questions on the basis of this information.

Figure  8.1. Alternative NTBs Levied by a “Small” Country

 

9.       Consider Figure 8.1. With free trade, the quantity of steel imported by Mexico equals:

a.   2 tons

b.   4 tons

c.   6 tons

d.   8 tons

ANSWER:     C

 

10.     Consider Figure 8.1. With free trade, Mexico’s consumer surplus and producer surplus respectively equal:

a.   $2,000 and $1,200

b.   $3,200 and $200

c.   $3,600 and $800

d.   $4,000 and $600

ANSWER:         B

 

11.     Referring to Figure 8.1, suppose the Mexican government imposes an import quota equal to 2 tons of steel. If Mexican steel importers behave as monopoly buyers and foreign exporters behave as competitive sellers, the overall welfare loss of the quota to Mexico equals:

a.   $200

b.   $400

c.   $600

d.   $800

ANSWER:         B

 

12.     Referring to Figure 8.1, again consider the steel import quota of Question #33. If foreign exporters behave as monopoly sellers, and Mexican importers behave as competitive buyers, the overall welfare loss of the quota to Mexico equals:

a.   $200

b.   $400

c.   $600

d.   $800

ANSWER:         D

 

13.   Referring to Figure 8.1, again consider the steel import quota of Question #33. If the Mexican government auctions import licenses to the highest foreign bidder, the overall welfare loss of the quota to Mexico equals:

a.     $200

b.     $400

c.     $600

d.     $800

            ANSWER:       B

 

14.   Consider Figure 8.1. Suppose instead that the Mexican government provides a subsidy of $200 per ton to its steel producers, as indicated by the supply schedule SM (with subsidy). The quantity of imports equals:

a.     1 ton

b.     2 tons

c.     3 tons

d.     4 tons

            ANSWER:       D

 

15.   Consider Figure 8.1. Referring to Question #36, the total cost of the subsidy to the Mexican government equals:

a.     $200

b.     $400

c.     $600

d.     $800

            ANSWER:       D

 

16.       What is the impact as a percentage of GDP of a 30% tariff in Klokionia if the tariff causes a 45% reduction in import quantities and total imports affected by these tariffs are 50% of GDP?

a.   1.17%

b.   2.45%

c.   3.38%

d.   5.00%

            ANSWER:       C

 

17.       Which of the following has overseen the global rules of government policy toward international trade since 1995?

a.   World Trade Organization

b.   General Agreement on Tariffs and Trade

c.   International Monetary Fund

d.   World Bank

            ANSWER:       A

 

18.       Which of the following is not a major principle of the World Trade Organization?

a.   Countries should deposit money at the World Bank during periods of economic expansion and should withdraw money from the Bank during periods of economic recession.

b.   Countries should not encourage exports in an unfair way.

c.   Countries should adhere to the most-favored nation principle.

d.   Countries should move towards trade liberalization.

            ANSWER:       A

 

19.       Which of the following is an effect of the Uruguay Round?

(1)        The Uruguay Round included provisions for future negotiations to liberalize trade in services.

(2)        The Uruguay Round included agreement requiring member countries to protect intellectual property.

(3)        The Uruguay Round included the conversion of import quotas in agricultural products to import tariffs.

a.   (1)

b.   (1) + (2)

c.   (2) + (3)

d.   (1) + (2) + (3)

            ANSWER:       D

 

20.       Which of the following allows the president of the United States to negotiate to eliminate unfair trade practices put in place by foreign governments?

a.   World Trade Organization

b.   General Agreement on Tariffs and Trade

c.   Section 301

d.   United Nations

            ANSWER:       C

Fill-in-the-Blank Questions

 

 

21.       Klokionia is a small country. Klokionia imposes an import quota in the market for clocks. Answer the following questions about Klokionia based on Figure 8.2.

a.         The change in consumer surplus in Klokionia that results from the imposition of the import quota is represented by the area: _______

b.         The change in producer surplus in Klokionia that results from the imposition of the import quota is represented by the area: _______

c.         The deadweight losses that result from the imposition of the import quota are represented by the area: _______

d.         If the Klokionian government auctions off import licenses, it will capture most of the area: _______

            e.         The size of the quota is _______ thousand clocks per year.

f.          The size of the reduction in consumer surplus that results from the imposition of the import quota in Klokionia is $_______ thousand.

g.         The size of the increase in production surplus that results from the imposition of the import quota in Klokionia is $_______ thousand.

h.         The size of the deadweight losses that result from the imposition of the import quota is $_______ thousand.

 

            ANSWER:       a.         -(x+y+z+w)

                                    b.         x

                                    c.         w+y

                                    d.         z

                                    e.         50

                                    f.          1,125

                                    g.         675     

                                    h.         150     

 

 

22.       Drewconia is a large country. Drewconia imposes an import quota in the market for clocks. Answer the following questions about Drewconia based on Figure 8.3.

a.         The change in consumer surplus in Drewconia that results from the imposition of the import quota is represented by the area: _______

b.         The change in producer surplus in Drewconia that results from the imposition of the import quota is represented by the area: _______

c.         The deadweight losses that result from the imposition of the import quota are represented by the area: _______

d.         If the Drewconian government auctions off import licenses in conjunction with the imposition of the import quota, the government will capture most of the area: _______

            e.         The size of the quota is _______ thousand clocks per year.

f.          The size of the reduction in consumer surplus that results from the imposition of the import quota is: $_______ thousand.

g.         The size of the increase in producer surplus that results from the imposition of the import quota is: $_______ thousand.

h.         The size of the deadweight losses of the import quota is $_______ thousand.

i.          The change in overall economic welfare in Klokionia that results from the imposition of the import quota is represented by the areas: _______

j.          The change in overall economic welfare in Klokionia is equal to: $_______ thousand.

k.         The change in overall world economic welfare is represented by the areas: _______

l.          The change in overall world economic welfare is $_______ thousand.

 

            ANSWERS:     a.         -(u + v + w +x)

                                    b.         u

                                    c.         v + x

                                    d.         w + z

                                    e.         175

                                    f.          1,250

                                    g.         450

                                    h.         100

                                    i.          z – (v + x)

                                    j.          600

                                    k.         -(v + x + y)

                                    l.          -200

 

 

True/False Questions

 

23.       Fixed favoritism is a method of assigning import licenses by selling the licenses on a competitive basis to the highest bidders.

            ANSWER:       False

 

24.       An import quota is a trade barrier in which an exporting country restricts exports to a country.

            ANSWER:       False

 

25.       The revenue effect of a quota will be captured by the government if the government auctions off import licenses.

            ANSWER:       True

 

26.       For a country trying to reduce the levels of imports in an economy, an import tariff is likely have less negative economic welfare effects than a voluntary export restraint.

            ANSWER:       True

 

27.       While a country can capture the revenue effect of a quota by auctioning off import licenses, the revenue effect of a voluntary export restraint is lost to foreign producers.

            ANSWER:       True

 

28.       The World Bank oversees global rules of government policy toward international trade.

            ANSWER:       False

 

29.       A domestic content requirement requires that import distributors in a domestic country must buy a certain percentage of the product domestically.

            ANSWER:       False

 

30.       While a large country can be either better off or worse off as a result of the imposition of a tariff, that same country will necessarily be worse off as a result of imposing an equivalent import quota.

            ANSWER:       False

 

31.       Section 301 allows the president to negotiate to eliminate unfair trade practices of foreign governments.

            ANSWER:       True

 

 

Essay Questions

 

33.       Explain the various methods that a government can use to allocate import licenses when it imposes an import quota. Be sure to include a graph and explain the differences in the effects of each method on economic welfare.

 

34.       You have been elected as the prime minister of Klokionia, a small country. Producers in Klokionia’s import-competing industry are struggling and you agree to impose protectionist measures to protect the industry. If you are interested in ensuring that economic welfare in Klokionia remains as high as possible, which of the following measures would you impose? Be sure to explain carefully the effects of each measure and why you chose the measure you chose.

            a.         import tariff

            b.         import quota

c.         negotiate a voluntary export restraint with the primary exporting country

 

35.       Explain the major outcomes of the Uruguay Round.

 

36.       What is Section 301? Has Section 301 been effective?

 

37.       It is possible to estimate the economic costs associated with tariff or quota protection by weighing such a cost against the overall size of GDP in the country. However, it is known that the simple calculation underestimates the costs of protection as a percentage of GDP. Present the simple calculation.  Explain the five ways in which the true cost is probably larger than the result obtained from the simple calculation.

 

38.       A friend in your study group tells you, “The import quota and the voluntary export restraint are exactly the same except that the VER is imposed by the foreign government and the import quota is imposed by the domestic government. So, you only need to study the import quota and remember that little difference.” Do you agree or disagree? Why?

 

39.       Clock producers in Drewconia successfully pressure the Drewconian parliament to adopt a protectionist measure to reduce clock imports. Which of the following measures would be less damaging to Drewconia? Which of the following would be less damaging to the world as a whole? Assume that the effect on imports of the following measures is equivalent.

            a.         a tariff to reduce clock imports

b.         negotiating a voluntary export restraint with foreign clock producing countries in order to reduce clock imports.