MIB International Trade & Policy 2 — Questions and Answers
Question 1: What is 'trade diversion' in the context of regional trade agreements?
- Redirecting exports to higher-value markets
- Shifting trade from efficient non-member producers to less efficient member producers due to preferential tariffs (Correct answer)
- Diversifying export markets to reduce risk
- Moving trade flows from land to sea routes
Correct answer: Shifting trade from efficient non-member producers to less efficient member producers due to preferential tariffs
Trade diversion occurs when a regional trade agreement causes a country to import from a less efficient member country instead of a more efficient non-member due to preferential tariff treatment.
Question 2: The 'new trade theory' introduced by Paul Krugman emphasizes that international trade is driven by:
- Only comparative cost differences between nations
- Economies of scale and consumer preference for variety (Correct answer)
- Natural resource endowments
- Currency exchange rate differentials
Correct answer: Economies of scale and consumer preference for variety
New trade theory argues that trade can arise from economies of scale and consumer desire for product variety even when countries have similar factor endowments.
Question 3: Under the WTO's Agreement on Subsidies and Countervailing Measures (ASCM), which type of subsidy is prohibited?
- R&D subsidies for civilian technologies
- Export subsidies contingent on export performance (Correct answer)
- Infrastructure subsidies for domestic transportation
- Agricultural support payments
Correct answer: Export subsidies contingent on export performance
The ASCM prohibits export subsidies that are contingent upon export performance, as they directly distort trade by artificially lowering the cost of exported goods.
Question 4: Which mechanism allows businesses to resolve trade disputes directly with foreign governments under international investment agreements?
- WTO Dispute Settlement Body
- Investor-State Dispute Settlement (ISDS) (Correct answer)
- ICC International Court of Arbitration
- UNCITRAL Mediation Rules
Correct answer: Investor-State Dispute Settlement (ISDS)
ISDS allows foreign investors to sue host governments in international arbitration when government actions breach investment treaty obligations, bypassing domestic courts.
Question 5: The 'gravity model' of international trade predicts that trade volume between two countries is:
- Proportional to their cultural similarity only
- Positively related to their economic size and negatively related to the distance between them (Correct answer)
- Determined solely by tariff levels
- Based on historical colonial relationships
Correct answer: Positively related to their economic size and negatively related to the distance between them
The gravity model predicts that bilateral trade increases with the economic size (GDP) of each country and decreases with the geographic distance between them.
Question 6: Which US trade law provision allows the President to impose tariffs on national security grounds?
- Section 301 of the Trade Act of 1974
- Section 232 of the Trade Expansion Act of 1962 (Correct answer)
- Title VII of the Tariff Act of 1930
- Section 201 of the Trade Act of 1974
Correct answer: Section 232 of the Trade Expansion Act of 1962
Section 232 authorizes the President to impose tariffs or quotas if the Department of Commerce determines that imports threaten to impair national security.
MIB International Trade & Policy 2
What is 'trade diversion' in the context of regional trade agreements?