Arguments for and against trade control/protection practice questions.

The infant industry argument for protection is economically valid only if

• the protected industry remains dependent on tariffs indefinitely
• the industry can eventually compete without protection
• the industry produces goods for which there is no domestic demand
• foreign competitors agree to withdraw from the market

Answer: the industry can eventually compete without protection

The argument rests on temporary support: the young industry must grow, lower its average costs and become internationally competitive so that protection can be removed.

In international trade, dumping occurs when a firm

• exports goods that fail the importing country's safety standards
• disposes of industrial waste in foreign territory
• refuses to export to particular countries for political reasons
• sells exports below production cost or below its home price

Answer: sells exports below production cost or below its home price

Dumping means exporting at less than cost (or less than the domestic price), often to drive out competitors in the importing country; it is a recognised justification for anti-dumping duties.

For which type of country are tariffs most defensible as a source of government revenue?

• A poor country that cannot easily tax incomes
• A high-income country with a well-developed tax system
• A country that imports no goods or services
• A country whose currency is fully convertible

Answer: A poor country that cannot easily tax incomes

Tariffs are collected at a few border points and are easy to administer, so governments that cannot effectively levy income or sales taxes may rely on them for revenue.

Country X imposes tariffs on Country Y's aircraft; Country Y responds with tariffs on Country X's agricultural exports. This sequence best illustrates

• the infant industry argument
• trade creation within a customs union
• the risk of a retaliatory trade war
• dumping by Country Y

Answer: the risk of a retaliatory trade war

A key argument against protection is that trading partners rarely accept tariffs passively; tit-for-tat retaliation can shrink trade and harm exporters in both countries.

Which of the following is an argument against trade protection?

• Safeguarding industries that are strategically important for defence
• Reduced choice and higher prices for domestic households
• Preventing foreign firms from dumping goods on the domestic market
• Raising government revenue in developing countries

Answer: Reduced choice and higher prices for domestic households

Protection restricts the variety of goods available and raises domestic prices, lowering consumers' real incomes — the other three options are standard arguments in favour of protection.

A long-run criticism of shielding domestic firms from import competition is that it

• forces firms to adopt world-class production technology
• guarantees lower prices for domestic consumers
• reduces the incentive for firms to cut costs and innovate
• eliminates all government revenue from trade taxes

Answer: reduces the incentive for firms to cut costs and innovate

Without competitive pressure from imports, protected firms can survive despite high costs, so protection tends to entrench inefficiency over time.