Question 1

An agreement among a group of countries to eliminate trade barriers among themselves,to present a common trading front to the rest of the world in terms of common barriers to trade,and to permit free movement of factors of production among member countries is called a

Accepted Answer

A common market involves the elimination of trade barriers among member countries, the presentation of a common trading front to the rest of the world, and the free movement of factors of production among member countries. A confederation involves a political and economic union of sovereign states, while a customs union involves the elimination of trade barriers among member countries and the adoption of a common external trade policy. A free-trade area involves the elimination of trade barriers among member countries, but does not necessarily involve a common external trade policy or the free movement of factors of production. A reciprocity association is not a commonly used term in international trade agreements.

Question 2

(NAFTA is currently being renegotiated,but was still in force at the beginning of 2019.) What is the fundamental guiding principle of the North American Free Trade Agreement (NAFTA)?

Accepted Answer

The fundamental guiding principle of NAFTA is national treatment, which requires that each country treats the products, services, and investment of the other countries in the same way it treats its own. This principle promotes free trade by removing discriminatory measures, subsidies, and other barriers to trade among the three member countries (Canada, Mexico, and the United States). Countervailing duties (A) are imposed to offset the effect of subsidies in the exporting country to prevent unfair competition. Most-favoured-nation status (B) is a trade agreement provision that requires each country to treat the other countries in the same way it treats its most favoured trading partner. Protectionism (D) is the policy of protecting domestic industries from foreign competition by imposing tariffs, quotas, or other barriers to trade. Strategic trade policy (E) is a government policy that aims to promote the growth and competitiveness of certain industries by providing subsidies, tax breaks, or other incentives to domestic firms.

Question 3

(NAFTA is currently being renegotiated,but was still in force at the beginning of 2019.) Suppose Canada imposed more stringent quality standards on pharmaceutical products being imported from Mexico than were imposed on firms producing the same products in Canada.This action would be

Accepted Answer

This action would violate NAFTA's principle of national treatment, which requires equal treatment of imported products with domestic products once they have entered the country's market. If Canada imposes more stringent quality standards on pharmaceutical products imported from Mexico compared to those produced domestically, it would be discriminating against Mexican products and therefore violating the national treatment principle.

Question 4

Suppose the Canadian government began subsidizing wheat farmers by paying them $25 per bushel of wheat produced.According to existing international trade agreements,other countries would be allowed to react to this subsidy by imposing a

Accepted Answer

Other countries would be allowed to impose countervailing duties to counteract the effects of the subsidy on the Canadian wheat industry. Countervailing duties are tariffs imposed by importing countries to neutralize the negative effects of foreign subsidies on domestic industries.

Question 5

Suppose Canada entered into a free-trade arrangement with China and,as a result,Canadian imports from India were replaced with imports from China.This would be an example of

Accepted Answer

Trade diversion occurs when trade is diverted from a more efficient producer outside a free trade area to a less efficient producer within a free trade area. In this case, Canada is importing goods from India, but if it enters into a free trade agreement with China, it may start importing more goods from China instead of India. This would lead to trade diversion as India, a more efficient producer, would lose out on business to China, a less efficient producer.

Question 6

Canada and the United States have been in a prolonged dispute about Canada's supply-managed agricultural industries,such as dairy and poultry.If the United States is successful in having Canada's "tariff equivalents" removed,who will lose and who will gain?

Accepted Answer

If Canada's "tariff equivalents" are removed, Canadian consumers would gain access to cheaper American products, while Canadian poultry and dairy producers would face increased competition, potentially losing market share.

Question 7

The table below shows the prices in Canada of one kilogram of cheddar cheese produced in three different countries.Assume that all cheddar cheese is identical.  TABLE 33-1 Refer to Table 33-1.Assume there is free trade in cheddar cheese and Canada imports the lowest price cheese from the United States.If a 40% tariff is then imposed on U.S.imports,Canada would be likely to purchase its cheese from ________.This situation would be one of ________.

Accepted Answer

The answer of The table below shows the prices in...

Question 8

Suppose five countries in Central America agree that products are to be freely traded across their borders,they will share a common set of import duties,and that the flow of people will continue to be restricted.This is an example of a

Accepted Answer

A common market would also require the free movement of people, so this option is not applicable. A political union would involve the creation of a single government and would go beyond just economic integration, so this option is also not applicable. A free-trade area would eliminate tariffs on goods traded among the countries, but it would not require a common set of import duties. A trade association is a looser form of economic cooperation, lacking the specific agreements described in the scenario. Therefore, the best choice is a customs union, as it involves the elimination of internal tariffs and the adoption of a common external tariff, while still allowing for restrictions on the flow of people.

Question 9

What is potentially an important argument against regional trade agreements?

Accepted Answer

The potential argument against regional trade agreements is the fact that the benefits of trade creation may be outweighed by the costs of trade diversion. Trade creation occurs when a regional trade agreement leads to an increase in trade between member countries. However, trade diversion occurs when the regional trade agreement leads to a shift in trade away from more efficient producers who are not members of the agreement, towards less efficient producers who are members of the agreement. As a result, the net effect on global efficiency can be negative.

Question 10

(NAFTA is currently being renegotiated,but was still in force at the beginning of 2019.) Some industries in Canada continue to have some trade protection within NAFTA.An example is

Accepted Answer

Canada's dairy industry has been protected under NAFTA, with a supply management system that limits imports and domestic production. However, this has been a point of contention in the current NAFTA renegotiations, with the US pushing for increased access to the Canadian dairy market.

Question 11

An agreement among a group of countries to eliminate trade barriers among themselves,to present a common trading front to the rest of the world in terms of common tariffs,but which does not permit free movement of factors of production among member countries,is called a

Accepted Answer

A customs union is an agreement among a group of countries to eliminate trade barriers among themselves and present a common trading front to the rest of the world in terms of common tariffs, but it does not permit free movement of factors of production among member countries. A common market would permit free movement of factors of production, while a free-trade area would eliminate tariffs among members but allow different tariff policies with non-member countries. Confederation and reciprocity association are not relevant terms in this context.

Question 12

What is meant by the concept of "trade creation"?

Accepted Answer

Trade creation refers to the increase in trade that results from the reduction or elimination of trade barriers among member countries in a free-trade area. This leads to greater specialization and trade based on comparative advantage, ultimately increasing the economic welfare of participating countries.

Question 13

Suppose Canada has a 20% tariff on the import of carpets,and Canada currently imports this product from India at a with-tariff price of $22.The with-tariff price of identical carpets from the United States is $24.Now suppose a free-trade agreement with the U.S.eliminates the tariff and so the no-tariff price from the U.S.is $20.Canada now purchases carpets from the U.S.This is an example of

Accepted Answer

Trade diversion occurs when a country switches its source of imports to a country with which it has a free trade agreement (FTA), rather than from a country with which it does not, even if the latter can produce the goods more cheaply before tariffs. In this case, Canada switches from importing carpets from India to the U.S. due to the elimination of tariffs on U.S. carpets, despite the fact that carpets from India were cheaper before the tariff was removed.

Question 14

Suppose Canada has a 20% tariff on the import of carpets,and Canada currently imports this product from India at a with-tariff price of $22.The with-tariff price of identical carpets from the United States is $24.Now suppose a free-trade agreement with the U.S.eliminates the tariff and so the no-tariff price from the U.S.is $20.Canada now purchases carpets from the U.S.Is Canada made better off from this trade diversion?

Accepted Answer

Trade diversion from a lower-cost supplier (India) to a higher-cost supplier (United States) due to the removal of tariffs on U.S. imports makes Canada worse off. Before the agreement, Canada was buying carpets at a lower price from India and collecting tariff revenue. After the agreement, even though the price from the U.S. matches the pre-tariff price from India, Canada loses the tariff revenue it was collecting on imports from India.

Question 15

What is meant by the concept of "trade diversion"?

Accepted Answer

Trade diversion refers to a situation where a member country of a trade agreement replaces a low-cost foreign supplier outside the agreement with a high-cost supplier located within the agreement. This is because the high-cost supplier is now more competitive due to the preferential treatment and lower trade barriers offered within the agreement, leading to a diversion of trade away from the more efficient foreign supplier.

Question 16

(NAFTA is currently being renegotiated,but was still in force at the beginning of 2019.) Suppose the Canadian government imposed more stringent environmental regulations on U.S.-owned pulp and paper mills than on Canadian-owned mills.This practice would be a violation of

Accepted Answer

The practice of imposing more stringent environmental regulations on U.S.-owned pulp and paper mills than on Canadian-owned mills would violate the NAFTA principle of national treatment, which requires that each member country treat the investors of the other member countries no less favorably than it treats its own investors. This means that Canadian-owned mills and U.S.-owned mills should be subject to the same regulations regardless of their ownership nationality.

Question 17

An agreement among a group of countries that allows for tariff-free trade among the members but leaves each member free to levy its own tariffs on imports from other countries is called a

Accepted Answer

A free-trade area is an agreement among a group of countries that allows for tariff-free trade among the members but leaves each member free to levy its own tariffs on imports from other countries. This means that the member countries can trade with each other without any barriers, but they can still have different tariff policies for non-member countries.

Question 18

(NAFTA is currently being renegotiated,but was still in force at the beginning of 2019.) According to the principle of "national treatment" in the North American Free Trade Agreement (NAFTA),member countries

Accepted Answer

The principle of "national treatment" in NAFTA means that member countries can establish new laws as they wish, as long as these laws apply equally to domestic and foreign-owned firms. This means that there should not be any discrimination against foreign companies operating in another NAFTA member country. However, this does not imply that member countries have complete autonomy over their own laws, can submit proposed laws to a cross-border judicial panel, or can establish subsidies to favor their own national firms over international firms. There are also specific environmental provisions in NAFTA, but they do not fully prohibit member countries from establishing new laws that may harm the domestic environment.

Question 19

Canadian governments (provincial and federal)currently provide enormous protection (through tariffs)to which of the following domestic industries?

Accepted Answer

Canadian governments provide significant protection through tariffs to the dairy industry in order to support Canadian farmers and ensure the stability of the domestic milk supply. This protection includes high tariffs on imported dairy products, such as cheese, to prevent competition from foreign producers.

Question 20

Canada and the United States had a prolonged dispute about alleged government subsidies to the softwood lumber industry in Canada.Who loses and who gains from the situation in which Canadian governments impose taxes on Canadian exports of softwood lumber to the United States?

Accepted Answer

When Canadian governments impose taxes on Canadian exports of softwood lumber to the United States, U.S. users of lumber (such as construction companies and consumers) lose because they have to pay higher prices for lumber. U.S. producers of lumber gain because the tax on Canadian lumber makes Canadian lumber more expensive, reducing competition and potentially allowing U.S. producers to increase their prices and market share.

Quiz 33: Trade Policy