Question 1

The economically damaging effects of the Great Depression were worsened in 1929 by the:

Accepted Answer

The Great Depression had roots in the failure of the world economy to mount a sustained economic recovery after the end of World War I in 1918. Things got worse in 1929 with the U.S. stock market collapse and the subsequent run on the U.S. banking system.

Question 2

Which of the following is true regarding the difference between GATT and WTO?

Accepted Answer

The Uruguay Round of GATT negotiations extended global trading rules to cover trade in services. The WTO was given the role of brokering future agreements to open up global trade in services. The WTO was also encouraged to extend its reach to encompass regulations governing foreign direct investment, something the GATT had never done. Two of the first industries targeted for reform were the global telecommunication and financial services industries.

Question 3

Which of the following is NOT a constraint on a firm's ability to disperse its productive activities to foreign countries?

Accepted Answer

We live in a world where many firms of all national origins increasingly depend for their competitive advantage on globally dispersed production systems. Such systems are the result of freer trade. Freer trade has brought great advantages to firms that have exploited it and to consumers who benefit from the resulting lower prices.

Question 4

Which of the following statements is true regarding GATT?

Accepted Answer

The GATT did not attempt to liberalize trade restrictions in one fell swoop. Rather, tariff reduction was spread over eight rounds. GATT regulations were enforced by a mutual monitoring mechanism. The last, the Uruguay Round, was launched in 1986 and completed in December 1993.

Question 5

Which of the following is a provision of the Uruguay Round Agreement?

Accepted Answer

Some of the provisions of the Uruguay Round included the following: Tariffs on industrial goods were to be reduced by more than one-third, and tariffs were to be scrapped on more than 40 percent of manufactured goods. Average tariff rates imposed by developed nations on manufactured goods were to be reduced to less than 4 percent of value, the lowest level in modern history. Agricultural subsidies were to be substantially reduced. GATT fair trade and market access rules were to be extended to cover a wide range of services. Barriers on trade in textiles were to be significantly reduced over 10 years.

Question 6

The WTO's Agreement on which of the following 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?

Accepted Answer

The WTO acts as an umbrella organization that encompasses the GATT along with two new sister bodies, one on services and the other on intellectual property. The WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) 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.

Question 7

One of the reasons why protectionist pressures arose around the world during the 1980s was:

Accepted Answer

During the 1980s and early 1990s, the world trading system erected by the GATT came under strain as pressures for greater protectionism increased around the world. One of the reasons for this was that many countries found ways to get around GATT regulations. Bilateral voluntary export restraints, or VERs, circumvent GATT agreements, because neither the importing country nor the exporting country complain to the GATT bureaucracy in Geneva-and without a complaint, the GATT bureaucracy can do nothing.

Question 8

Which of the following is an argument against embracing strategic trade policy?

Accepted Answer

Governments do not always act in the national interest when they intervene in the economy; politically important interest groups often influence them. Thus, a further reason for not embracing strategic trade policy, according to Krugman, is that such a policy is almost certain to be captured by special-interest groups within the economy, who will distort it to their own ends.

Question 9

Which of the following best explains the reason for the rise in protectionist pressures around the world during the 1980s?

Accepted Answer

During the 1980s and early 1990s, the world trading system erected by the GATT came under strain as pressures for greater protectionism increased around the world. One of the reasons for this was the strained world trading system due to the persistent trade deficit in the world's largest economy, the United States.

Question 10

The Smoot-Hawley Act had a damaging effect on:

Accepted Answer

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 creditor nation. The Smoot-Hawley Act had a damaging effect on employment abroad.

Question 11

Why did telecommunications companies welcome the telecommunication deal brokered by WTO in 1997?

Accepted Answer

In February 1997, the WTO brokered a deal to get countries to agree to open their telecommunication markets to competition, allowing foreign operators to purchase ownership stakes in domestic telecommunication providers and establishing a set of common rules for fair competition. Most of the world's biggest markets-including the United States, European Union, and Japan-were fully liberalized by January 1, 1998, when the pact went into effect. All forms of basic telecommunication service are covered, including voice telephony, data, and satellite and radio communications. Many telecommunication companies responded positively to the deal, pointing out that it would give them a much greater ability to offer their business customers one-stop shopping-a global, seamless service for all their corporate needs and a single bill.

Question 12

The WTO was encouraged to extend its reach to encompass regulations governing foreign direct investment, something the GATT had never done. Two of the first industries targeted for this reform were:

Accepted Answer

The WTO was encouraged to extend its reach to encompass regulations governing foreign direct investment, something the GATT had never done. Two of the first industries targeted for reform were the global telecommunication and financial services industries.

Question 13

Which of the following indicates the difference between GATT and WTO?

Accepted Answer

WTO has taken over responsibility for arbitrating trade disputes and monitoring the trade policies of member countries. While the WTO operates on the basis of consensus as the GATT did, in the area of dispute settlement, member-countries are no longer able to block adoption of arbitration reports. Every stage of the procedure is subject to strict time limits. Thus, the WTO has something that the GATT never had-teeth.

Question 14

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, is most likely to:

Accepted Answer

Paul Krugman argues that a strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry is a beggar-thy-neighbor policy that boosts national income at the expense of other countries. A country that attempts to use such policies will probably provoke retaliation.

Question 15

Which of the following multilateral agreements was established under U.S. leadership in 1947, with the objective to liberalize trade by eliminating tariffs, subsidies, import quotas, and the like?

Accepted Answer

Under U.S. leadership, the GATT was established in 1947. The GATT was a multilateral agreement whose objective was to liberalize trade by eliminating tariffs, subsidies, import quotas, and the like.

Question 16

Bilateral voluntary export restraints, or VERs, circumvented GATT agreements, because:

Accepted Answer

Bilateral voluntary export restraints, or VERs, circumvent GATT agreements, because neither the importing country nor the exporting country complains to the GATT bureaucracy in Geneva-and without a complaint, the GATT bureaucracy can do nothing.

Question 17

The United States accused Libya and Iran of supporting terrorist action and building weapons of mass destruction. The U.S. government, therefore, imposed trade sanctions against the two countries. Which of the following political arguments does this exemplify?

Accepted Answer

Established in 1995 under the provisions of the Uruguay Round, the WTO acts as an umbrella organization that encompasses the GATT and has taken over responsibility for arbitrating trade disputes and monitoring the trade policies of member countries.

Question 18

According to Krugman, which of the following best indicates the dangers of a strategic trade policy?

Accepted Answer

Paul Krugman argues that a strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry is a beggar-thy-neighbor policy that boosts national income at the expense of other countries. A country that attempts to use such policies will probably provoke retaliation. In many cases, the resulting trade war between two or more interventionist governments will leave all countries involved worse off than if a hands-off approach had been adopted in the first place.

Question 19

According to Krugman, the ideal way for a country to respond, when the foreign competitors of its companies are already being supported by government subsidies, is probably not to engage in retaliatory action, but to:

Accepted Answer

Krugman may be right about the danger of a strategic trade policy leading to a trade war. The problem, however, is how to respond when one's competitors are already being supported by government subsidies. According to Krugman, the answer is probably not to engage in retaliatory action but to help establish rules of the game that minimize the use of trade-distorting subsidies.

Question 20

A government should use subsidies to support promising firms that are active in newly emerging industries, according to:

Accepted Answer

The strategic trade policy argument has two components. First, it is argued that by appropriate actions, a government can help raise national income if it can somehow ensure that the firm or firms that gain first-mover advantages in an industry are domestic rather than foreign enterprises. Thus, according to the strategic trade policy argument, a government should use subsidies to support promising firms that are active in newly emerging industries.

Quiz 7: Government Policy and International Trade