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International Business 15th Edition by Daniels – Test Bank

International Business: Environments and Operations, 15e (Daniels et al.)

Chapter 6 Governmental Influence on Trade

1) Protectionism will most likely affect which aspect of a company’s operations?

1. A) selecting employees
2. B) investing short-term capital
3. C) acquiring foreign supplies
4. D) relocating personnel overseas

Answer: C

Diff: 2

Learning Outcome: Define the fundamental concepts of international business

Skill: Concept

Objective: 1
AACSB: Application of knowledge

2) The term protectionism, when applied to international trade, refers to ________.

1. A) governmental restrictions and competitive support actions to affect trade flows


2. B) payments to dock workers to prevent pilferage of imported shipments
3. C) border checks to prevent entry of illegal aliens
4. D) methods used to prevent intellectual property theft

Answer: A

Diff: 1

Learning Outcome: Define the fundamental concepts of international business

Skill: Concept

Objective: 1

AACSB: Application of knowledge

3) Why should managers have an understanding of trade protectionism?

1. A) Trade protectionism targets factor endowments, thus affecting the best country to locate
production.
2. B) Trade protectionism affects a company’s ability to sell abroad and ability to compete at
home.
3. C) Trade protectionism affects the number of people permitted to practice a specific profession.
4. D) Trade protectionism prevents companies’ enactment of merger and acquisition agreements.

Answer: B

Diff: 2

Learning Outcome: Define the fundamental concepts of international business

Skill: Concept

Objective: 1

AACSB: Analytical thinking


4) Managers should understand the effect of trade protectionism because ________.

1. A) trade protectionism may limit the number of people permitted to practice a specific
profession
2. B) trade protectionism requires the payment of high insurance rates to transport goods
internationally
3. C) trade protectionism may prevent companies’ enactment of merger and acquisition
agreements
4. D) trade protectionism may make it difficult for a company to buy what it needs from foreign
suppliers

Answer: D

Diff: 2

Learning Outcome: Define the fundamental concepts of international business

Skill: Concept

Objective: 1

AACSB: Application of knowledge

5) The government of Country X imposes import restrictions on steel to help the domestic steel
industry in depressed areas. What is the most likely result of such restrictions?

1. A) damaging other industries in Country X


2. B) devaluing the currency of Country X
3. C) lowering steel prices in Country X
4. D) triggering boycotts in Country X

Answer: A

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Application

Objective: 1

AACSB: Analytical thinking


6) Assume a government places restrictions on a specific product from a specific foreign
country. What would be the government’s most likely concern about the foreign country’s
response?

1. A) the foreign producers raising the prices of their exports


2. B) the foreign country restricting its own imports
3. C) the foreign country restricting its exports in that industry
4. D) the foreign producers seeking other markets

Answer: B

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Application

Objective: 1

AACSB: Analytical thinking

7) Assume a government is considering import restrictions on sugar because sugar imports are
hurting the domestic industry. Which of the following groups is LEAST likely to speak out on
the subject?

1. A) politicians in areas that grow sugar


2. B) employees of sugar companies
3. C) sugar company owners
4. D) sugar consumers

Answer: D

Diff: 2

Skill: Application

Objective: 2

AACSB: Analytical thinking


8) What is the most likely reason that consumers rarely protest import restrictions that raise the
prices they pay for a specific product?

1. A) They reason that if the import restrictions are removed, the foreign producers will raise their
prices to those of the domestic producers anyway.
2. B) Many countries prohibit consumers to band together to influence political actions.
3. C) Typically, although the added costs to consumers for a given product are high in aggregate,
they are fairly trivial for most individual consumers.
4. D) They reason that if they do something to hurt domestic employment for one product, the
displaced workers will then do something that will hurt their own employment.

Answer: C

Diff: 3

Skill: Concept

Objective: 2

AACSB: Analytical thinking

9) Unemployed workers are most apt to form a pressure group to support ________.

1. A) export restrictions
2. B) import restrictions
3. C) price limitations
4. D) import subsidies

Answer: B

Diff: 1

Skill: Concept

Objective: 2

AACSB: Application of knowledge

10) Successful trade retaliation is most likely achieved ________.

1. A) on agricultural products
2. B) on manufactured products
3. C) by a large trading country
4. D) by a small trading country

Answer: C

Diff: 2

Skill: Concept

Objective: 2

AACSB: Reflective thinking

11) Imports can stimulate exports by ________.

1. A) redistributing the work force


2. B) curtailing domestic competition
3. C) generating more tax revenue
4. D) increasing foreign income

Answer: D

Diff: 2

Learning Outcome: Discuss the roles of exporting, importing, and countertrade in international
business

Skill: Concept

Objective: 2

AACSB: Application of knowledge

12) All of the following are generally true about trade-displaced workers EXCEPT which one?

1. A) They move abroad to take new jobs.


2. B) They earn less in their new jobs than they earned in their old ones.
3. C) They spend their unemployment benefits on living rather than retraining.
4. D) They have difficulty finding new work because of educational deficiencies.

Answer: A

Diff: 2
Skill: Concept

Objective: 2

AACSB: Analytical thinking

13) The rationale for the infant-industry argument for trade protection is that ________.

1. A) incubator centers in which business, government, and academia cooperate will develop
entrepreneurial companies
2. B) a country should give one firm in an industry a monopoly status so that it will grow large
enough to be competitive internationally
3. C) it takes time for an industry to become competitive in world markets, so protection is needed
to help this industry pass through the critical period
4. D) lower restrictions should be placed on products coming from countries where a government
has a large sphere of political influence

Answer: C

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 1

AACSB: Reflective thinking

14) Which of the following statements most likely undermines the infant-industry argument?

1. A) Total unit costs decrease through economies of scale.


2. B) High tariffs to prevent foreign competition increase government revenues in the protected
country.
3. C) Domestic entrepreneurs need assistance to compete in industries with high entry barriers.
4. D) Experience of operating over time triggers higher productivity and global competitiveness.

Answer: B

Diff: 3
Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Critical Thinking

Objective: 1

AACSB: Analytical thinking

15) A problem that can arise in using trade protectionism to develop international
competitiveness for a domestic industry is that ________.

1. A) it is difficult to identify industries that have a high probability of reaching competitiveness


2. B) assistance should be given only if entry barriers to new firms are very low
3. C) the protecting countries lose too much revenue from import duties
4. D) a short product life cycle makes the industry quickly noncompetitive

Answer: A

Diff: 3

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 3

AACSB: Application of knowledge

16) Which of the following is a problem with the infant-industry argument for protection?

1. A) Most developed countries increasingly have a larger portion of retirees than youth.
2. B) Consumer groups become very active in protesting the higher prices that result during
infancy.
3. C) Other countries retaliate by limiting exports of technology needed by the infant industry
producers.
4. D) If the industry does not lower costs sufficiently to be competitive, it becomes a formidable
pressure group for continued protection.

Answer: D

Diff: 3
Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 3

AACSB: Application of knowledge

17) The industrialization argument for trade protection in developing countries is based on the
assumption that ________.

1. A) the protected industry will become competitive over time with economies of scale
2. B) unemployment and underemployment exist in rural areas, so little agricultural output is lost
as people move into industrial jobs
3. C) subsidizing production is a better means of protection than limiting imports
4. D) it is better to depend on buying agricultural surpluses from developed countries than to
produce these agricultural goods

Answer: B

Diff: 2

Learning Outcome: Compare and contrast theories of international trade

Skill: Concept

Objective: 1

AACSB: Analytical thinking

18) Unlike the infant-industry argument, the industrialization argument for trade protection
________.

1. A) requires independence from other countries


2. B) stresses labor-intensive production methods despite high costs
3. C) emphasizes use of locally available raw materials for manufacturing inputs
4. D) presumes that economic growth will occur even if domestic manufactured prices are not
globally competitive

Answer: D

Diff: 3

Learning Outcome: Compare and contrast theories of international trade


Skill: Concept

Objective: 1

AACSB: Analytical thinking

19) Developing countries have sometimes adopted policies to shift people out of agriculture and
into industry by protecting manufactured production. One of the problems they have encountered
is that ________.

1. A) people have been too reluctant to leave rural areas to go to the cities
2. B) food shortages have increased in rural areas because of worker shortages
3. C) demand for social and political services has increased excessively in the cities
4. D) developed countries have retaliated with protection of products from the developing
countries

Answer: C

Diff: 3

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 3

AACSB: Application of knowledge

20) Terms of trade refers to ________.

1. A) the quantity of imports that a given quantity of a country’s exports can buy
2. B) specific requirements placed on imports and exports at the port of entry or exit
3. C) requirements agreed upon by two countries to regulate bilateral trade
4. D) an account statement showing a country’s annual imports and exports

Answer: A

Diff: 2
Learning Outcome: Define the fundamental concepts of international business

Skill: Concept

Objective: 3

AACSB: Application of knowledge

21) Which term refers to restricting imports in order to boost domestic production and
consumption of goods that would otherwise be imported?

1. A) import substitution
2. B) terms-of-trade
3. C) most-favored nation
4. D) in-sourcing

Answer: A

Diff: 1

Learning Outcome: Compare and contrast theories of international trade

Skill: Concept

Objective: 3

AACSB: Application of knowledge

22) Export-led development refers to ________.

1. A) a country’s efforts to promote its exports in order to reduce its trade deficits
2. B) a policy to promote domestic production of goods that would otherwise be imported
3. C) a program to promote industries with export potential
4. D) decreases in infrastructure development due to the loss of revenue from export tariffs

Answer: C

Diff: 2

Learning Outcome: Compare and contrast theories of international trade

Skill: Concept
Objective: 3

AACSB: Application of knowledge

23) Which of the following best explains why the experience of countries such as Taiwan and
South Korea are used to support export-led development policies?

1. A) their low inflation


2. B) their increased FDI
3. C) their industry diversity
4. D) their rapid economic growth

Answer: D

Diff: 2

Learning Outcome: Compare and contrast theories of international trade

Skill: Concept

Objective: 1

AACSB: Analytical thinking

24) The relationship between import substitution policies and export-led development policies is
best characterized by which of the following?

1. A) Import-substitution policies are more likely to lead to production of mature products,


whereas export-led development policies result in production of growth products.
2. B) The two are hard to distinguish because production under import substitution may eventually
be exported.
3. C) Production under import substitution policies, as opposed to export-led development
policies, is more likely to be located in urban areas.
4. D) Production under import substitution policies, as opposed to export-led development
policies, is likely to be more labor-intensive.

Answer: B

Diff: 3

Learning Outcome: Compare and contrast theories of international trade

Skill: Concept
Objective: 1

AACSB: Application of knowledge

25) Advocates of the comparable access argument for trade protection primarily assert that
domestic industries ________.

1. A) will deteriorate in countries that have lower import restrictions than their trading partners
2. B) should be required to implement export-led development policies on foreign competitors
3. C) are entitled to the same access to foreign markets as foreign industries have to their markets
4. D) are forced to lower prices for domestic consumers because of foreign import restrictions

Answer: C

Diff: 2

Learning Outcome: Compare and contrast theories of international trade

Skill: Concept

Objective: 3

AACSB: Application of knowledge

26) It is sometimes contended that by imposing import controls a country might be able to
increase its exports. This contention is premised on ________.

1. A) the country’s simultaneous currency depreciation, which decreases the price of its exports
2. B) using the import taxes to institute efficiency measures in potential export industries
3. C) raising domestic prices in one industry so that the excess domestic profits in that industry can
compensate for the cost of dumping products from another industry into foreign markets
4. D) getting other countries to maintain or relax their current import restrictions instead of
escalating restrictions in a trade war

Answer: D

Diff: 3

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept
Objective: 3

AACSB: Application of knowledge

27) Country X wants to eliminate its balance of trade deficit while simultaneously keeping prices
low for imported essentials. Which of the following methods would most likely achieve these
dual objectives?

1. A) devaluing its currency


2. B) enacting selective import restrictions
3. C) using tight monetary policies to deflate price levels
4. D) spurring productivity increases through general tax breaks for industry

Answer: B

Diff: 3

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Application

Objective: 3

AACSB: Reflective thinking

28) All of the following are reasons a country might institute import restrictions to improve its
balance of trade position with other countries EXCEPT to ________.

1. A) maintain essential industries


2. B) reduce imports and encourage exports
3. C) get comparable access for its companies
4. D) bargain away restrictions by other countries

Answer: A

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept
Objective: 3

AACSB: Reflective thinking

29) Country X is withholding goods from international markets in an attempt to raise prices
abroad. Such actions will be most effective for Country X if the nation ________.

1. A) supports the development of substitutions


2. B) provides domestic industries with tax breaks
3. C) receives low-interest loans from foreign banks
4. D) holds a monopoly on the product or resource

Answer: D

Diff: 2

Skill: Application

Objective: 3

AACSB: Analytical thinking

30) Countries most likely establish export restrictions to ________.

1. A) ensure their population obtain the goods first


2. B) raise prices in foreign markets
3. C) encourage substitute products
4. D) reduce domestic production

Answer: B

Diff: 2

Skill: Concept

Objective: 3

AACSB: Application of knowledge

31) Export restrictions have a tendency to ________.


1. A) favor domestic consumers
2. B) protect employment in the export-restricted industries
3. C) lower prices in foreign markets
4. D) encourage the development of substitutes in the restricting country

Answer: A

Diff: 2

Skill: Concept

Objective: 3

AACSB: Analytical thinking

32) All of the following are potential problems of using export controls EXCEPT which one?

1. A) There is an incentive for other countries to develop production of their own.


2. B) Domestic producers may have less incentive to increase output.
3. C) Prices go up in the country imposing the controls.
4. D) There is more incentive for smuggling.

Answer: C

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 3

AACSB: Reflective thinking

33) Exporting below cost or below the home country price is called ________.

1. A) countertrade
2. B) an export-led development policy
3. C) a strategic trade policy
4. D) dumping

Answer: D

Diff: 1
Learning Outcome: Define the fundamental concepts of international business

Skill: Concept

Objective: 3

AACSB: Application of knowledge

34) There are several reasons for a company to sell products abroad at either below cost or below
the price in the home country. Which of the following is one of these reasons?

1. A) encouraging foreign consumers to try new products


2. B) improving the exporting country’s terms of trade
3. C) gaining imports that are sold below cost
4. D) following import substitution objectives

Answer: A

Diff: 2

Learning Outcome: Define the fundamental concepts of international business

Skill: Concept

Objective: 3

AACSB: Analytical thinking

35) Countries sometimes fear that foreign producers are pricing their exports artificially low.
This fear is most likely based on the assumption that ________.

1. A) foreign companies will lack the earnings to repay their foreign debt
2. B) insufficient earnings will be available to improve product technology
3. C) foreign producers will charge exorbitant prices after putting competitors out of business
4. D) developing countries will be unable to maintain critical industries needed in times of war

Answer: C

Diff: 3
Skill: Concept

Objective: 3

AACSB: Analytical thinking

36) According to the optimum tariff theory, a foreign producer will most likely ________.

1. A) ship highly taxed goods internationally on a per-unit basis


2. B) lower its export prices if the importing country imposes an import tax on its products
3. C) assess a tax on goods shipped internationally based on a percentage of the goods’ value
4. D) seek import tariffs by using the comparable access argument

Answer: B

Diff: 2

Learning Outcome: Compare and contrast theories of international trade

Skill: Concept

Objective: 3

AACSB: Application of knowledge

37) An argument against limiting exports to unfriendly countries is that ________.

1. A) the costs of the sanctions are borne by innocent people rather than by leaders
2. B) markets cannot be regained after the countries become friendly
3. C) one country’s essential product is superfluous to another
4. D) the exporting nation’s cultural identity is harmed

Answer: A

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 3

AACSB: Ethical understanding and reasoning


38) A possible drawback to the essential industry argument for import protectionism is
________.

1. A) that such protection hurts the protecting country’s balance of payments


2. B) in times of military emergency, almost any product could be considered essential
3. C) other countries find supplies elsewhere
4. D) unemployment increases in the protecting country

Answer: B

Diff: 2

Skill: Concept

Objective: 3

AACSB: Application of knowledge

39) Defense arguments are sometimes used to prevent exports to unfriendly countries. This runs
the risk of the targeted country ________.

1. A) becoming politically destabilized


2. B) removing import restrictions
3. C) finding alternative sources of supply
4. D) banding with other countries to form a cartel

Answer: C

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 3

AACSB: Analytical thinking

40) What is the main motive for countries’ protection of their film/cinema industries?
1. A) to keep prices low for their citizens
2. B) to improve their balance of payments
3. C) to diversify their economies
4. D) to maintain their cultural sovereignty

Answer: D

Diff: 2

Skill: Concept

Objective: 3

AACSB: Reflective thinking

41) The most common type of tariff is the ________ tariff.

1. A) export
2. B) import
3. C) transit
4. D) ad valorem

Answer: B

Diff: 1

Skill: Concept

Objective: 4

AACSB: Application of knowledge

42) An import tariff may be protective ________.

1. A) only if it is on imports the country produces domestically


2. B) if it serves primarily to restrict entry of hazardous materials
3. C) if it does not generate significant tax revenue for essential industries
4. D) even though the importing country does not produce the product

Answer: D

Diff: 2
Skill: Concept

Objective: 4

AACSB: Application of knowledge

43) In addition to protection, tariffs serve to ________.

1. A) generate revenue
2. B) subsidize exports
3. C) subsidize imports
4. D) increase consumption

Answer: A

Diff: 2

Skill: Concept

Objective: 4

AACSB: Application of knowledge

44) Which term refers to a tariff or duty assessed as a percentage of an item’s value?

1. A) specific duty
2. B) effective tariff
3. C) ad valorem duty
4. D) compound tariff

Answer: C

Diff: 1

Skill: Concept

Objective: 4

AACSB: Application of knowledge


45) What is the primary difficulty associated with dismantling developed countries’ agricultural
subsidies?

1. A) Rural areas in the United States, the European Union, and Japan are disproportionately
represented in their governments.
2. B) Developing countries put pressure on developed countries to maintain the subsidies so that
they receive food products at a lower price.
3. C) The subsidies are used to counter the commodity agreements set up mainly by developing
countries.
4. D) The subsidies are at the consumer, rather than producer, level, and everyone benefits from
the lower prices.

Answer: A

Diff: 3

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 4

AACSB: Application of knowledge

46) In most cases, which type of government protection assistance is most controversial?

1. A) business development services


2. B) foreign business contacts
3. C) trade expositions
4. D) tariffs

Answer: D

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 4

AACSB: Analytical thinking


47) Tied aid requires a recipient to ________.

1. A) donate a portion of the funds to the donor country’s infrastructure needs


2. B) use the capital in any way as long as donor country approval is granted
3. C) employ local workers in management positions
4. D) spend the funds in the donor country

Answer: D

Diff: 2

Learning Outcome: Define the fundamental concepts of international business

Skill: Concept

Objective: 4

AACSB: Application of knowledge

48) Most countries have agreed on how to assess values when their customs agents levy tariffs.
Which of the following best expresses this agreement?

1. A) They should use the value of similar goods arriving at about the same time.
2. B) They should use the declared invoice price unless they doubt its authenticity.
3. C) They should assess a value based on local costs to produce a similar product.
4. D) They should assess a value based on the expected final consumer sales price.

Answer: B

Diff: 2

Skill: Concept

Objective: 4

AACSB: Reflective thinking

49) In international trade, what is a quota?

1. A) a guarantee by one country to buy some minimum amount from another


2. B) a quantitative limit on the amount of a product that can be imported or exported
3. C) a countertrade arrangement that establishes the value of imports and exports
4. D) a bilateral agreement calling for mutual access to markets

Answer: B

Diff: 1

Skill: Concept

Objective: 4

AACSB: Application of knowledge

50) A voluntary export restriction (VER) refers to ________.

1. A) an agreement between two countries to reciprocally restrict exports to one another


2. B) requests by governments for companies to limit exports of militarily useful technology
3. C) limiting companies’ exports to increase domestic supplies
4. D) limits placed on exports by a government of an exporting country at the request of the
government of an importing country

Answer: D

Diff: 1

Skill: Concept

Objective: 4

AACSB: Application of knowledge

51) An import license is ________.

1. A) an agreement whereby one country gives another country permission to use a patent that a
company has registered there
2. B) a requirement that exporters take merchandise in lieu of money as payment for their sales
3. C) a requirement that permission be secured from governmental authorities before importation
can be undertaken
4. D) a government prohibition of imports from a specific country

Answer: C
Diff: 1

Skill: Concept

Objective: 4

AACSB: Application of knowledge

52) Why are offsets considered protectionist measures?

1. A) Exporters must often find markets for goods outside their lines of expertise.
2. B) Exports must be sold at a certain percentage price below the price of domestic producers.
3. C) Companies must submit samples to government authorities before receiving export
permission.
4. D) Trading companies must incur additional inventory carrying charges and pay significantly
higher tariffs.

Answer: A

Diff: 3

Skill: Concept

Objective: 4

AACSB: Analytical thinking

53) Which of the following hypothetical examples would be a restriction on the import of
services?

1. A) The U.S. restricts foreign companies from carrying cargo between two U.S. cities.
2. B) Japan restricts North Koreans from visiting Tokyo Disneyland.
3. C) China does not allow the importation of rice from Thailand.
4. D) Canada does not allow Air Canada to buy Brazilian aircraft.

Answer: A

Diff: 2

Skill: Application

Objective: 4

AACSB: Reflective thinking


54) The fact that there are few reciprocal agreements among countries on the licensing of
professionals most likely means that ________.

1. A) universities’ study abroad programs do not enable students to obtain dual degrees and
licenses from more than one country
2. B) more service functions are being handled as not-for-profit
3. C) people immigrate to those countries with the highest standards so as to more easily become
licensed anywhere else
4. D) there is an effective limitation on trade in services

Answer: D

Diff: 2

Learning Outcome: Discuss the roles of exporting, importing, and countertrade in international
business

Skill: Application

Objective: 4

AACSB: Reflective thinking

55) A physician, who is a citizen of and licensed in Country A, meets the professional licensing
requirements of Country B. The physician will most likely ________.

1. A) have to pass a language proficiency exam before being allowed to work in Country B
2. B) not be allowed to work in the not-for-profit sector in Country A or Country B for a set period
3. C) have to get a work permit from Country B’s immigration authorities to work in Country B
4. D) have to work in the not-for-profit sector in Country B for a period of time before being
permitted to work for a profit-seeking organization

Answer: C

Diff: 3

Skill: Application

Objective: 4

AACSB: Reflective thinking


56) The U.S. automobile industry has attempted to counter import competition in all the
following ways EXCEPT ________.

1. A) concentrating on market niches that initially had less import competition


2. B) lobbying for customs deposits so that importers’ costs would be raised
3. C) moving some production to lower-cost countries and exporting to the United States
4. D) effecting internal adjustments, such as cost efficiencies and improved quality

Answer: B

Diff: 2

Learning Outcome: Discuss the roles of exporting, importing, and countertrade in international
business

Skill: Concept

Objective: 5

AACSB: Analytical thinking

57) Companies with ________ would most likely oppose global protectionist measures.

1. A) internationally integrated supply chains


2. B) domestically focused supply chains
3. C) multidomestic production facilities
4. D) product differentiation

Answer: A

Diff: 2

Skill: Concept

Objective: 5

AACSB: Analytical thinking


58) In nearly half the cases in which U.S. firms have requested protection from imports, one or
more U.S. companies in the industry opposed the protection. What was the reason for opposing
protection?

1. A) They did not want consumers to have to pay higher prices that would result from protection.
2. B) These were foreign-owned companies that saw the opportunity to serve the U.S. market.
3. C) They feared that they would lose foreign export markets because of retaliation.
4. D) They believed that they could compete against global and domestic rivals.

Answer: D

Diff: 3

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 5

AACSB: Analytical thinking

59) Which of the following is NOT causing greater complexity in the regulation of trade?

1. A) growth in export tariffs


2. B) services available over the Internet
3. C) heightened concern about product safety
4. D) development of new products that must be classified

Answer: A

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 5

AACSB: Reflective thinking


60) The U.S. catfish industry petitioned the U.S. government for increased taxes on imported
Vietnamese fish, claiming that the fish were being sold below the cost of production. The U.S.
catfish industry was accusing the Vietnamese fish industry of ________.

1. A) dumping
2. B) using an embargo
3. C) subsidizing
4. D) using offsets

Answer: A

Diff: 2

Skill: Application

Objective: 4

AACSB: Application of knowledge

61) The U.S. catfish industry successfully petitioned the U.S. government to require that catfish
varieties imported from Vietnam be labeled as tra, basa, or pangasius. This is an example of
which of the following?

1. A) an embargo
2. B) a tariff
3. C) a nontariff barrier
4. D) a direct price influence

Answer: C

Diff: 2

Skill: Application

Objective: 4

AACSB: Application of knowledge

62) People who argue for lifting the U.S. trade embargo with Cuba claim all of the following
EXCEPT which one?
1. A) The embargo has not achieved its purpose of changing Cuba’s economic and political system.
2. B) U.S. companies lose Cuban sales to competitors from other countries.
3. C) Increased exposure to the United States would be a more effective force of change.
4. D) Cuba has largely become a market economy already.

Answer: D

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 5

AACSB: Application of knowledge

63) People who argue for keeping the U.S. trade embargo with Cuba claim all of the following
EXCEPT which one?

1. A) There is not much economic potential from trade given Cuba’s small population and low per
capita income.
2. B) Removal of the embargo will cause much more Cuban immigration to the United States.
3. C) If the Cuban economy is weakened just a bit more, the Cuban political-economic system
cannot be sustained.
4. D) There will be a backlash among countries supplying such commodities as sugar to the United
States if the U.S. buys them from Cuba instead.

Answer: B

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 5

AACSB: Application of knowledge


64) The term protectionism, when applied to international trade, refers to governmental
restrictions and incentives to affect trade flows.

Answer: TRUE

Diff: 1

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 1

AACSB: Application of knowledge

65) In most cases, trade protectionism makes it easier for a company to buy what it needs and to
sell products in global markets.

Answer: FALSE

Diff: 1

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 1

AACSB: Application of knowledge

66) The group most likely to become involved in disputes concerning trade protectionism is
consumers.

Answer: FALSE

Diff: 2

Skill: Concept

Objective: 2
AACSB: Analytical thinking

67) Helping a struggling domestic company through import restrictions frequently causes other
countries to retaliate.

Answer: TRUE

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 2

AACSB: Analytical thinking

68) The countries most likely to be successful at using trade retaliation are large trading
countries.

Answer: TRUE

Diff: 2

Skill: Concept

Objective: 2

AACSB: Application of knowledge

69) On average, workers displaced by imports earn higher wages in the new jobs they accept.

Answer: FALSE

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept

Objective: 3

AACSB: Analytical thinking

70) The infant-industry argument for trade protection holds that an industry needs government
protection from imports until it becomes competitive enough in world markets.

Answer: TRUE

Diff: 1

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 1

AACSB: Application of knowledge

71) Infant-industry protection requires some segment of the economy to incur the higher costs
when local production is inefficient.

Answer: TRUE

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 1

AACSB: Application of knowledge

72) The argument for using protectionism to bring about industrialization in developing countries
presumes that gains will occur because the industry will become internationally competitive.
Answer: FALSE

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 1

AACSB: Reflective thinking

73) Export prices of primary products fluctuate less than export prices of manufactured products.

Answer: FALSE

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 3

AACSB: Application of knowledge

74) Import substitution is a program promoting local production of products that would
otherwise be imported.

Answer: TRUE

Diff: 1

Skill: Concept

Objective: 1

AACSB: Application of knowledge

75) Export-led development refers to the off-shoring of production.


Answer: FALSE

Diff: 1

Skill: Concept

Objective: 1

AACSB: Application of knowledge

76) The argument for using import controls to promote exports is partially premised on the
assumption that other countries will remove their import restrictions as a result.

Answer: TRUE

Diff: 2

Skill: Concept

Objective: 3

AACSB: Analytical thinking

77) The comparable access argument for import restrictions is a more valid economic argument
for products using small-scale technology than for products requiring substantial economies of
scale to be competitive.

Answer: FALSE

Diff: 2

Skill: Concept

Objective: 3

AACSB: Reflective thinking

78) Countries typically establish export restrictions to encourage the development of substitute
products.
Answer: FALSE

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 3

79) Export controls are highly effective for digital products, such as computers, TVs, and
cameras.

Answer: FALSE

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 3

AACSB: Application of knowledge

80) The lowering of a foreign producer’s price as a result of an imposed import tax is known as
an optimum tariff.

Answer: TRUE

Diff: 1

Skill: Concept

Objective: 3

AACSB: Application of knowledge


81) Home country consumers are typically active in preventing their domestic companies from
dumping products into foreign markets.

Answer: FALSE

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Synthesis

Objective: 2, 3

AACSB: Analytical thinking

82) The essential-industry argument holds that industries with potential export capabilities
should be protected.

Answer: FALSE

Diff: 1

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept

Objective: 3

AACSB: Application of knowledge

83) Import trade controls, but not export trade controls, can be used as a weapon of foreign
policy.

Answer: FALSE

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Concept

Objective: 4

AACSB: Application of knowledge

84) The most common type of tariff is the export tariff.

Answer: FALSE

Diff: 1

Skill: Concept

Objective: 4

AACSB: Application of knowledge

85) An effective tariff is the sum of the ad valorem tariff plus the specific duty.

Answer: FALSE

Diff: 1

Skill: Concept

Objective: 4

AACSB: Analytical thinking

86) Agricultural subsidies by developed countries impede the competitiveness of agricultural


exports by developing countries.

Answer: TRUE

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Concept
Objective: 4

AACSB: Application of knowledge

87) When customs officials set a value on which to place an import tariff, they ordinarily use the
declared invoice price unless they doubt its authenticity.

Answer: TRUE

Diff: 2

Skill: Concept

Objective: 4

AACSB: Application of knowledge

88) A quota is a quantitative limit on the amount of a product that can be traded.

Answer: TRUE

Diff: 1

Skill: Concept

Objective: 4

AACSB: Application of knowledge

89) The purpose of “Made in” labels on imported products is to enable countries to keep records
of the origin of imports.

Answer: FALSE

Diff: 2

Skill: Concept

Objective: 4
AACSB: Analytical thinking

90) Governments sometimes prohibit operations of private companies, foreign or domestic, in


some sectors because they feel these services should not be sold at a profit.

Answer: TRUE

Diff: 2

Skill: Concept

Objective: 4

AACSB: Application of knowledge

91) At present there is little reciprocal recognition of professional licensing among countries.

Answer: TRUE

Diff: 2

Skill: Concept

Objective: 4

AACSB: Application of knowledge

92) Companies that have integrated their supply chains internationally tend to lobby their home
governments for increased protectionist measures.

Answer: FALSE

Diff: 2

Skill: Concept

Objective: 5

AACSB: Application of knowledge


93) When a company is seeking protection from imports, it can usually improve its chances of
getting that protection if it allies with most of the companies in the industry.

Answer: TRUE

Diff: 1

Skill: Concept

Objective: 5

AACSB: Analytical thinking

94) The international regulatory situation for trade is becoming more, rather than less, complex.

Answer: TRUE

Diff: 1

Skill: Concept

Objective: 5

AACSB: Application of knowledge

95) Every time countries enter a new trading agreement, service trade tends to grow more rapidly
than merchandise trade.

Answer: FALSE

Diff: 1

Skill: Concept

Objective: 5

AACSB: Reflective thinking

96) What are the disadvantages of import restrictions in regards to creating domestic
employment opportunities?
Answer: One problem with restricting imports in order to create jobs is that other countries
might retaliate with their own restrictions. New import restrictions by a major country have
usually brought quick retaliation, sometimes causing more job losses than gains in industries
protected by the new restrictions. Even if no country retaliates, the restricting country will gain
jobs one place and lose them somewhere else, such as in import-handling jobs. Imports may also
help create jobs in other industries, and these industries may form pressure groups against
protectionism.

Diff: 3

Skill: Critical Thinking

Objective: 3

AACSB: Analytical thinking

97) Explain the rationale for and problems with making the infant-industry argument work as
intended.

Answer: The infant-industry argument holds that a government should guarantee an emerging
industry a large share of the domestic market until it becomes efficient enough to compete
against imports. Developing countries still use this argument to support their protectionist
policies. The infant-industry argument is based on the logic that although the initial output costs
for an industry in a given country may be so high as to make it noncompetitive in world markets;
over time the costs will decrease to a level sufficient to achieve efficient production. The cost
reductions may occur for two reasons: As companies gain economies of scale and employees
become more efficient through experience, total unit costs drop to competitive levels.

Although it is reasonable to expect costs to decrease over time, they may not go down enough,
which poses two problems for protecting an industry. First, governments have difficulty
identifying those industries that have a high probability of success. If infant-industry protection
goes to an industry that does not reduce costs enough to make it competitive against imports,
chances are its owners, workers, and suppliers will constitute a formidable pressure group that
may prevent the importation of a cheaper competitive product. Second, even if policymakers can
ascertain which industries are likely to succeed, it does not necessarily mean that companies in
those industries should receive governmental assistance. Entrepreneurs may incur the costs and
reap the benefits instead. For the infant-industry argument to be fully viable, future benefits
should exceed early costs.

Diff: 3

Learning Outcome: Discuss arguments for and against government intervention in international
business
Skill: Synthesis

Objective: 1, 3

AACSB: Analytical thinking

98) Why do developing countries sometimes impose import restrictions to increase their levels of
industrialization?

Answer: Countries with a large manufacturing base generally have higher per capita incomes
than do countries without such a base. Moreover, a number of countries, such as the United
States and Japan, developed an industrial base while largely preventing competition from
foreign-based production. Many developing countries use protection to increase their level of
industrialization because of industrial countries’ economic success and experience. Specifically,
they believe:

1. Surplus workers can more easily increase manufacturing output than they can increase
agricultural output.
2. Inflows of foreign investment in the industrial area will promote growth.
3. Prices and sales of traditional agricultural products and raw materials fluctuate too much,
harming economies that depend on too few of them.
4. Markets and prices for industrial products will grow faster than those for agricultural products.

Diff: 3

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Critical Thinking

Objective: 1

AACSB: Analytical thinking

99) What is the difference between import substitution policies and export-led development
policies? What are the potential effects of each?

Answer: Developing countries promote industrialization by restricting imports in order to


encourage local production for local consumption goods which they formerly imported. This is
known as import substitution. If the protected industries do not become efficient, consumers may
have to support them by paying higher prices or higher taxes. In contrast to import substitution,
some countries have achieved rapid economic growth by promoting export industries, an
approach known as export-led development. These countries try to develop industries for which
export markets should logically exist. Industrialization may result initially in import substitution,
yet export-led development of the same products may be feasible later.

Diff: 3

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Synthesis

Objective: 1, 3

AACSB: Analytical thinking

100) Many companies and industries argue that they should have the same access to foreign
markets as foreign industries and companies have to their markets. In a short essay, discuss this
issue of “comparable access,” or “fairness.”

Answer: From an economic standpoint, comparable access argues that in industries in which
increased production will greatly decrease cost, either from scale economies or learning effects,
producers that lack equal access to a competitor’s market will have a disadvantage in gaining
enough sales to be cost-competitive. The argument for equal access also is presented as one of
fairness. There are at least two arguments against this fairness doctrine. First, there are
advantages of freer trade, even if imposed unilaterally. Restrictions may deny one’s own
consumers lower prices. Second, governments would find it cumbersome and expensive to
negotiate separate agreements for each of the many thousands of different products and services
that might be traded.

Diff: 3

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Synthesis

Objective: 1, 3

AACSB: Analytical thinking


101) What are common reasons that governments enact export restrictions? What are the
possible negative consequences of such restrictions?

Answer: A country may limit exports of a product that is in short supply worldwide in order to
favor domestic consumers. Typically, greater supply drops local prices beneath those in the
intentionally undersupplied world markets. However, this discourages domestic producers from
increasing output and encourages them to smuggle output to sell abroad. It also encourages
foreign producers to develop substitutes or production of their own. Countries also fear that
foreign producers will price their exports so artificially low that they drive domestic producers
out of business, after which they charge monopoly prices. However, competition among foreign
producers limits their ability to charge exorbitant prices. The ability to price low abroad may
result from high domestic prices due to a lack of competition at home or from home country
governmental subsidies.

Diff: 3

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Synthesis

Objective: 1, 3

AACSB: Analytical thinking

102) What is dumping? What are the possible effects of dumping on a country’s economy?

Answer: When companies export below cost or below their home country price, this is called
dumping. Most countries prohibit imports of dumped products, but enforcement usually occurs
only if the imported product disrupts domestic production. If there is no domestic production,
then the only host country effect is a low price to its consumers. Companies may dump because
they cannot otherwise build a market abroad. They can afford to dump if the competitive
landscape allows them to charge high domestic prices or if their home country government
subsidizes them. They may also incur short-term losses abroad if they believe they can recoup
those losses after eliminating competitors in the market. Home country consumers or taxpayers
seldom realize that they are, in effect, paying so that foreign consumers have low prices. A
company believing it is competing against dumped products may ask its government to restrict
the imports.

Diff: 3

Skill: Application

Objective: 3
AACSB: Analytical thinking

103) Briefly discuss the four noneconomic rationales for governmental intervention in the free
movement of trade: maintaining essential industries, preventing shipments to unfriendly
countries, maintaining or extending spheres of influence, and preserving national identity.

Answer:

1. Maintenance of essential industries (especially defense): A major consideration behind


governmental action on trade is the protection of essential domestic industries during
peacetime so that a country is not dependent on foreign sources of supply during war. This is
called the essential-industry argument. This argument for protection has much appeal in rallying
support for import barriers. However, in times of real crisis or military emergency, almost any
product could be essential. Because of the high cost of protecting an inefficient industry or a
higher-cost domestic substitute, the essential-industry argument should not be accepted
without a careful evaluation of costs, real needs, and alternatives. Once an industry becomes
protected, that protection is difficult to terminate because protected companies and their
employees support politicians who will support their protection from imports.
2. Prevention of shipments to unfriendly countries: Groups concerned about security often use
defense arguments to prevent exports, even to friendly countries, of strategic goods that might
fall into the hands of potential enemies or that might be in short supply domestically. Export
constraints may be valid if the exporting country assumes there will be no retaliation that
prevents it from securing even more essential goods from the potential importing country.
Trade controls on nondefense goods also may be used as a weapon of foreign policy to try to
prevent another country from easily meeting its economic and political objectives.
3. Maintenance or extension of spheres of influence: Governments frequently give aid and credits
to, and encourage imports from, countries that join a political alliance or vote a certain way
within international bodies. A country’s trade restrictions may also coerce governments to
follow certain political actions or punish companies whose governments do not follow the
actions.
4. Conservation of activities that help preserve a national identity: Countries are held together
partially through a common sense of identity that sets their citizens apart from other
nationalities. To protect this “separateness,” countries limit foreign products and services in
certain sectors, particularly the media.

Diff: 2

Learning Outcome: Discuss arguments for and against government intervention in international
business

Skill: Critical Thinking

Objective: 1

AACSB: Diverse and multicultural work environments


104) Describe and compare the different types of tariffs (duties).

Answer: A tariff, or duty, the most common type of trade control, is a tax that a government
levies on a good shipped internationally. If collected by the exporting country, it is known as an
export tariff; if collected by a country through which the goods have passed, it is a transit tariff;
if collected by the importing country, it is an import tariff. The import tariff is by far the most
common. Import tariffs primarily serve as a means of raising the price of imported goods so that
domestically produced goods will gain a relative price advantage.

A tariff may be protective even though there is no domestic production in direct competition.
Tariffs also serve as a source of governmental revenue. Import tariffs are of little importance to
large industrial countries, but are a major source of revenue in many developing countries.
Transit tariffs were once a major source of revenue for countries, but they have been nearly
abolished through governmental treaties. A government may assess a tariff on a per-unit basis, in
which case it is a specific duty. It may assess a tariff as a percentage of the value of the item, in
which case it is an ad valorem duty. If it assesses both specific and an ad valorem duty on the
same product, the combination is a compound duty. A specific duty is easy for customs officials
who collect duties to assess because they do not need to determine a good’s value on which to
calculate a percentage tax. Because an ad valorem tariff is based on the total value of the
product, meaning the raw materials and the processing combined, developing countries argue
that the effective tariff on the manufactured portion turns out to be higher than the published
tariff rate.

Diff: 3

Skill: Application

Objective: 4

AACSB: Analytical thinking

105) In a short essay, list and discuss the nontariff barriers that relate to direct price influences:
subsidies, aid and loans, customs valuations, and other direct price influences.

Answer:

1. Subsidies: Countries sometimes make direct payments (called subsidies) to domestic companies
to reduce their costs or compensate them for losses incurred from selling abroad.
2. Aid and loans: Governments also give aid and loans to other countries. If the recipient is
required to spend the funds in the donor country, some products can compete abroad that
might otherwise be noncompetitive.
3. Customs valuation: Most countries have agreed on a procedure for assessing values when their
customs agents levy tariffs, but customs must ascertain whether the invoice correctly identifies
the product, its price, and its origin.
4. Other direct price influences: Countries frequently use other means to affect prices, including
special fees, requirements that customs deposits be placed in advance of shipment, and
minimum price levels at which goods can be sold after they have customs clearance.

Diff: 3

Skill: Application

Objective: 4

AACSB: Analytical thinking

106) List and define the types of nontariff barriers that limit the quantity of goods traded: quotas,
embargoes, buy local legislation, standards and labels, specific permission requirements,
administrative delays, and reciprocal requirements.

Answer:

1. Quotas: The most common type of import or export restriction based on quantity is the quota.
From the standpoint of imports, a quota most frequently limits the quantity of a product
allowed to be imported in a given year. The amount frequently reflects a guarantee that
domestic producers will have access to a certain percentage of the domestic market in that year.
2. Embargoes: An embargo is a specific type of quota that prohibits all trade on a whole category
of products or on all products from a given country. Governments use embargoes in an attempt
to use economic means to achieve political goals.
3. “Buy Local” legislation: Another form of quantitative trade control is “buy local” legislation. If
government purchases are a large part of total expenditures within a country, they comprise an
important part of the market. Most governments favor domestic producers in their purchases of
goods. Sometimes they specify a content restriction—in which a certain percentage of the
product is of local origin.
4. Standards and labels: Countries commonly have set classification, labeling, and testing
standards in a manner that allows the sales of domestic products but inhibits that of foreign-
made ones. The purpose of testing standards is to protect the safety or health of the domestic
population. However, there have been situations where exporters have argued that such
restrictions protect domestic producers instead.
5. Specific permission requirements: Some countries require that potential importers or exporters
secure permission from governmental authorities before conducting trade transactions, a
requirement known as an import license.
6. Administrative delays: Closely related to specific permission requirements are intentional
administrative delays, which create uncertainty and raise the cost of carrying inventory.
7. Reciprocal requirements: Governments sometimes require that exporters take merchandise in
lieu of money or that they promise to buy merchandise or services in the country to which they
export. This requirement is common in the aerospace and defense industries—sometimes
because the importer is short of foreign currency to purchase what it wants, and sometimes
because the sales are so large the buyer has strong negotiating power.

Diff: 3

Skill: Application

Objective: 4

AACSB: Analytical thinking

107) What are the main arguments for limiting trade in services? What is your opinion on
limiting trade in services?

Answer: Countries restrict trade in services for three reasons:

1. Essentiality: Countries judge certain service industries to be essential because they serve
strategic purposes or because they provide social assistance to their citizens. They sometimes
prohibit private companies, foreign or domestic, in some sectors because they feel the services
should not be sold for profit.
2. Standards: Governments limit foreign entry into many service professions to ensure practice by
qualified personnel. The licensing standards of these personnel vary by country. At present,
there is little reciprocal recognition in licensing from one country to another because
occupational standards and requirements differ substantially.
3. Immigration: Satisfying the standards of a particular country does not guarantee that a foreigner
can then work there. Governmental regulations often require that an organization—domestic or
foreign—search extensively for qualified personnel locally before it can even apply for work
permits for personnel it would like to bring in from abroad.

Diff: 3

Skill: Critical Thinking

Objective: 4

AACSB: Analytical thinking

International Business: Environments and Operations, 15e (Daniels et al.)


Chapter 7 Cross-National Cooperation and Agreements

1) ________ integration is the political and economic agreements among countries that give
preference to member countries to the agreement.

1. A) Global
2. B) Economic
3. C) Bilateral
4. D) Regional

Answer: B

Diff: 1

Learning Outcome: Define the fundamental concepts of international business

Skill: Concept

Objective: 1

2) Country A and Country B make an agreement to cooperate more closely and implement tariff
reductions. Which of the following best describes this agreement?

1. A) double commodity integration


2. B) multilateral integration
3. C) regional integration
4. D) bilateral integration

Answer: D

Diff: 1

Learning Outcome: Define the fundamental concepts of international business

Skill: Application

Objective: 1

3) The European Union is an example of ________ integration.


1. A) regional
2. B) relative
3. C) global
4. D) bilateral

Answer: A

Diff: 2

Skill: Concept

Objective: 1

AACSB: Diverse and multicultural work environments

4) Global integration occurs as countries from all over the world decide to cooperate through the
________.

1. A) EU
2. B) NAFTA agreement
3. C) WTO
4. D) CARICOM

Answer: C

Diff: 1

Skill: Concept

Objective: 1

AACSB: Diverse and multicultural work environments

5) Which of the following statements most accurately describes the relationship between trading
groups and MNEs?

1. A) Trading groups have no influence on the size of the regional market.


2. B) Regional trading groups can define the rules under which companies must operate within
that region.
3. C) Companies never need to change their organizational structure to take advantage of regional
trading groups.
4. D) Regional trading groups have no influence on an MNE’s strategy since they operate
worldwide.
Answer: B

Diff: 2

Skill: Concept

Objective: 1

6) Anderson Enterprises is a U.S. firm that manufactures light fixtures for commercial and
residential consumers. Anderson is looking to expand internationally, so the firm should most
likely ________.

1. A) focus on developing new recruitment strategies and selection tests


2. B) change their organizational structure to fit the norms of the foreign country
3. C) disregard changes in trading groups because they have little effect on a company
4. D) look to expand beyond the triad regions currently controlled by the top 500 MNEs

Answer: B

Diff: 2

Learning Outcome: Discuss factors affecting the organizational structures of international


businesses

Skill: Application

Objective: 1

7) Baldani Manufacturing, an Italian firm, plans to expand into Asia. In order to take advantage
of regional trading groups, Baldani will most likely need to change its ________.

1. A) operating strategies
2. B) selection test methods
3. C) bilateral trade agreements
4. D) economic integration methods

Answer: A

Diff: 2
Skill: Application

Objective: 1

8) Which of the following is NOT one of the regions included in the triad regions of the world?

1. A) South America
2. B) Europe
3. C) North America
4. D) Asia

Answer: A

Diff: 2

Learning Outcome: Define the fundamental concepts of international business

Skill: Concept

Objective: 1

AACSB: Dynamics of the global economy

9) The ________ clause embodied the fundamental principle of GATT—trade without


discrimination.

1. A) most-favored-nation
2. B) nontariff barriers
3. C) free rider
4. D) normal trade relations

Answer: A

Diff: 1

Skill: Concept

Objective: 1

10) Which of the following accurately identifies a difference between GATT and the WTO?

1. A) GATT could enforce member compliance with agreements, but the WTO cannot.
2. B) At its inception, GATT had more member nations than the WTO currently has.
3. C) GATT withdrew the most-favored-nation clause, but the WTO reinstated it.
4. D) GATT rules did not cover trade in services, but the rules of the WTO do.

Answer: D

Diff: 2

Skill: Concept

Objective: 1

11) Under the WTO agreement, ________.

1. A) a dispute resolution mechanism allows countries to bring grievances to the WTO against
countries that levy inappropriate trade discrimination measures
2. B) there is no dispute resolution mechanism except for trade involving environmental products
3. C) countries are allowed to place trade barriers on member countries with no particular
justification, because like GATT the WTO has no enforcement mechanism
4. D) tariffs are permitted to be levied by developed countries against developing countries but not
against each other

Answer: A

Diff: 2

Skill: Concept

Objective: 1

AACSB: Ethical understanding and reasoning

12) A major problem with the Doha Round is that ________.

1. A) developing countries want developed countries to better protect their intellectual property
2. B) developing countries want a reduction in agricultural subsidies maintained by the developed
countries
3. C) the WTO does not want the developing countries to liberalize their investment rules
4. D) because of security issues, not all countries were able to attend the meetings, so it was
impossible to get a consensus vote
Answer: B

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 1

13) Most trade groups contain countries in the same area of the world. Why is this so?

1. A) The distances that goods need to travel between such countries are short.
2. B) Distribution channels are not easily established in adjacent countries.
3. C) Adjacent countries are reluctant to coordinate policies.
4. D) Neighboring countries usually lack a common history and interests.

Answer: A

Diff: 3

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 4

AACSB: Dynamics of the global economy

14) Which of the following groups of countries is most likely to form a regional trading group?

1. A) India, Argentina, France


2. B) Canada, United States, Mexico
3. C) Brazil, Ukraine, Japan
4. D) Spain, South Africa, Mongolia

Answer: B

Diff: 2

Skill: Application
Objective: 4

AACSB: Dynamics of the global economy

15) The 27 member EU negotiates trade agreements as one. The EU and Brazil have negotiated a
strategic trade alliance which is an example of a ________.

1. A) customs union
2. B) global free trade agreement
3. C) bilateral agreement
4. D) multilateral agreement

Answer: C

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Application

Objective: 2

AACSB: Dynamics of the global economy

16) The goal of a ________ is to abolish all tariffs among member countries.

1. A) customs union
2. B) common market
3. C) free trade agreement
4. D) common internal tariff

Answer: C

Diff: 1

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 4

17) Of the following possibilities, the European Union is best described as a ________.
1. A) customs union
2. B) domestic organization
3. C) global bargaining unit
4. D) common language agreement

Answer: A

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 4

AACSB: Diverse and multicultural work environments

18) A ________ results when free mobility of factors of production is added to a customs union.

1. A) customs union
2. B) common market
3. C) free trade agreement
4. D) regional trade agreement

Answer: B

Diff: 1

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 4

19) Members of the Andean Community (CAN) have a common external tariff. CAN is most
likely a ________.

1. A) free trade agreement


2. B) customs union
3. C) domestic trade zone
4. D) free trade sovereignty

Answer: B
Diff: 1

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Application

Objective: 4

20) ________ effects of trade agreements are the shifting of resources from inefficient to
efficient companies as trade barriers fall.

1. A) Dynamic
2. B) Static
3. C) Economic
4. D) Barrier

Answer: B

Diff: 1

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 3

21) ________ effects of economic integration are the overall growth in the market and the
impact on a company caused by expanding production and by the company’s ability to achieve
greater economies of scale.

1. A) Dynamic
2. B) Static
3. C) Economic
4. D) Barrier

Answer: A

Diff: 1

Skill: Concept

Objective: 3
22) Trade shifting to countries within a regional trade agreement at the expense of trade with
countries not in the agreement is called ________.

1. A) a dynamic effect
2. B) trade creation
3. C) trade diversion
4. D) economy of scale

Answer: C

Diff: 2

Skill: Concept

Objective: 3

23) When the European Union was formed, the size of the market increased for European
companies. This is most likely an example of a ________.

1. A) dynamic effect
2. B) static effect
3. C) trade diversion
4. D) trade reflection

Answer: A

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Application

Objective: 3

AACSB: Dynamics of the global economy

24) Since production has shifted to more efficient producers due to comparative advantage,
consumers in Country X have had access to more goods at lower prices. Which of the following
most likely exists?

1. A) trade specialization
2. B) trade diversion
3. C) trade creation
4. D) trade internalization

Answer: C

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Application

Objective: 3

25) A free trade agreement is likely to increase efficiency because of ________.

1. A) decreased competition
2. B) increased competition
3. C) decreased trade diversion
4. D) decreased trade creation

Answer: B

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 3

26) Assume that U.S. companies are importing the same product from Mexico and Taiwan. The
United States enters into an FTA with Mexico but not with Taiwan. Consequently, the United
States begins to import more goods from Mexico (due to lower tariffs) than from Taiwan, even
though the Mexican products are not any better or cheaper. This is most likely an example of
________.

1. A) trade specialization
2. B) trade internalization
3. C) trade creation
4. D) trade diversion

Answer: D

Diff: 2
Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Application

Objective: 3

AACSB: Dynamics of the global economy

27) Because the size of the market increases when trade barriers fall, companies can increase
their production, which will result in lower costs per unit. This phenomenon is known as
________.

1. A) trade creation
2. B) economies of scale
3. C) diseconomies of scale
4. D) increased competition

Answer: B

Diff: 1

Skill: Concept

Objective: 3

28) The ________ is the European Union’s ultimate decision-making body and is composed of
the different ministers of the member countries.

1. A) European Commission
2. B) Council of the European Union
3. C) European Parliament
4. D) European Court of Justice

Answer: B

Diff: 2

Skill: Concept

Objective: 5
29) The three major responsibilities of the ________ are legislative power, control over the
budget, and supervision of executive decisions.

1. A) European Commission
2. B) European Council
3. C) European Parliament
4. D) European Court of Justice

Answer: C

Diff: 2

Skill: Concept

Objective: 5

30) The EU organization that provides political leadership, drafts laws, and runs the daily
programs of the EU is the ________.

1. A) European Commission
2. B) Council of Ministers
3. C) European Parliament
4. D) European Central Bureaucracy

Answer: A

Diff: 2

Skill: Concept

Objective: 5

31) The EU organization that ensures consistent interpretation and application of EU treaties is
the ________.

1. A) European Commission
2. B) Council of Ministers
3. C) Court of Justice
4. D) Council of Treaties and Laws

Answer: C

Diff: 2
Skill: Concept

Objective: 5

AACSB: Ethical understanding and reasoning

32) Which of the following was primarily responsible for establishing the euro?

1. A) Lisbon Treaty
2. B) Treaty of Maastricht
3. C) European Finance Act
4. D) Single European Act

Answer: B

Diff: 2

Skill: Concept

Objective: 5

33) Critics of the Lisbon Treaty primarily argue that the legislation will ________.

1. A) reduce national sovereignty


2. B) implement trade restrictions
3. C) develop a monetary union
4. D) weaken decision making

Answer: A

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Application

Objective: 4

34) The ________ is the common currency of the European Union.


1. A) franc
2. B) pound
3. C) euro
4. D) mark

Answer: C

Diff: 1

Skill: Concept

Objective: 5

35) Which of the following statements about the euro is true?

1. A) It was adopted by all existing EU members when it was first initiated.


2. B) It must be adopted by countries as a precondition to joining the EU.
3. C) It cannot be used by countries that are not members of the EU.
4. D) It was designed to eliminate currency as a barrier to trade in the EU.

Answer: D

Diff: 3

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 5

36) Which of the following members of the European Union has NOT adopted the euro?

1. A) United Kingdom
2. B) Estonia
3. C) Germany
4. D) Greece

Answer: A

Diff: 2

Skill: Concept
Objective: 5

37) Hudson Manufacturing is an MNE based in the U.S. with operations in Asia. The firm is
considering expansion into the European Union. Which of the following questions is most
relevant to the decision?

1. A) What is the primary language of most workers?


2. B) Which country has the best production location?
3. C) Which currency has the most favorable value of the euro?
4. D) Which country has the lowest tariffs for manufactured products?

Answer: B

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Critical Thinking

Objective: 5

AACSB: Reflective thinking

38) Hudson Manufacturing is an MNE based in the U.S. with operations in Asia. The firm is
considering expansion into the European Union. Executives at the firm are debating whether
central Europe or Eastern Europe would be best for the firm. Which of the following best
supports a decision to establish operations in Eastern Europe?

1. A) Hudson wants to implement a high-performance work system.


2. B) Hudson plans to staff the foreign facility with local managers.
3. C) Hudson wants to minimize costs by keeping wages low.
4. D) Hudson recently lost money in a joint venture.

Answer: C

Diff: 3

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Critical Thinking

Objective: 5
39) Korman Industries is a foreign multinational that recently established operations in the
European Union. What is the most likely advantage for Korman as a result?

1. A) Governance processes are streamlined because local governments have been eliminated.
2. B) Market size is larger because of the elimination of internal tariff barriers.
3. C) Differential external tariff barriers exist for product shipments.
4. D) The EU uses English as its official language.

Answer: B

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Application

Objective: 5

40) Which of the following recently threatened the future of the EU’s common currency?

1. A) refusal of the UK to use the euro


2. B) failed mergers and acquisitions
3. C) debt crisis in Greece
4. D) human rights issues

Answer: C

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 5

AACSB: Dynamics of the global economy

41) Which of the following are members of NAFTA?

1. A) the United States, Canada, and Mexico


2. B) North America and Latin America
3. C) the United Kingdom, the United States, and Canada
4. D) the United States, Canada, and Brazil

Answer: A

Diff: 1

Skill: Concept

Objective: 5

AACSB: Diverse and multicultural work environments

42) NAFTA was primarily formed because the member nations have ________.

1. A) static and dynamic liberalization policies


2. B) similarly sized economies and resources
3. C) geographic proximity to each other
4. D) competing interests with the EU

Answer: C

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 5

43) NAFTA is a good example of ________.

1. A) trade divestment
2. B) trade diversion
3. C) the theory of trade disruption
4. D) the theory of trade implementation

Answer: B

Diff: 2
Skill: Concept

Objective: 5

44) Compared to the European Union, the North American Free Trade Agreement ________.

1. A) has a stronger currency linkage due to the U.S. dollar


2. B) has more trade problems since it is a customs union
3. C) is significantly larger in population and total GNI
4. D) is slightly smaller in population and GDP

Answer: D

Diff: 2

Skill: Concept

Objective: 5

AACSB: Dynamics of the global economy

45) Under NAFTA, rules of origin ensure that ________.

1. A) only goods produced mostly within the region are eligible for liberal tariff conditions
2. B) only American products are shipped to Canada and Mexico duty-free
3. C) all members import products only from member nations
4. D) all members have the same external and internal tariffs

Answer: A

Diff: 2

Skill: Concept

Objective: 5

46) According to regional content rules, at least ________ of the net cost of most products must
come from the NAFTA region in order to get access to the tariff reductions of NAFTA.

62. A) 62.5%
63. B) 50%
64. C) 45%
65. D) 40.5%

Answer: B

Diff: 2

Skill: Concept

Objective: 5

47) Which of the following is a unique provision of NAFTA?

1. A) tariff elimination
2. B) common currency
3. C) environmental standards
4. D) immigration oversights and policies

Answer: C

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 5

48) The major trade group in South America involving Brazil, Paraguay, Uruguay, and
Argentina is ________.

1. A) MERCOSUR
2. B) UNASUR
3. C) APEC
4. D) CACM

Answer: A

Diff: 1
Skill: Concept

Objective: 5

49) The ________ is a preferential trade agreement that was organized in 1967 and comprises
Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand,
and Vietnam.

1. A) APEC
2. B) OAU
3. C) ASEAN
4. D) CAFTA

Answer: C

Diff: 1

Skill: Concept

Objective: 5

50) Which of the following is the primary focus of the African Union (AU)?

1. A) FDI influx
2. B) democracy
3. C) economic integration
4. D) intrazonal trade relations

Answer: B

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 5

51) An NGO is ________.

1. A) an agency of the United Nations


2. B) a private institution independent of a government
3. C) any organization working on environmental issues
4. D) an organization that is concerned only with workers’ rights

Answer: B

Diff: 1

Skill: Concept

Objective: 6

52) Which of the following is most likely a true statement about the relationship between the
United Nations and NGOs?

1. A) The UN must license an NGO for it to be involved in any international relief efforts.
2. B) A UN committee discusses issues of importance to NGOs but does not regulate their
activities.
3. C) The UN determines which NGOs can work on international humanitarian issues and relief
efforts.
4. D) NGOs typically operate in only one country, whereas UN agencies can operate anywhere in
the world.

Answer: B

Diff: 3

Skill: Concept

Objective: 6

53) Many NGOs, including Africa Now, Quaker Peace and Social Witness, and Save the
Children, are members of the ________.

1. A) Ethical Trading Initiative


2. B) International Red Cross Council
3. C) United Nations Global Compact
4. D) United Nations Economic and Social Council

Answer: A

Diff: 1
Skill: Concept

Objective: 6

54) Commodity agreements ________.

1. A) were initially established to attempt to stabilize commodity prices


2. B) are effective in regulating the price of grains but not minerals
3. C) are effective in regulating the prices of both grains and minerals
4. D) were disbanded by the United Nations for being non-competitive

Answer: A

Diff: 2

Skill: Concept

Objective: 6

55) The role of most commodity agreements now is to ________.

1. A) discuss issues and disseminate information about commodities


2. B) keep consumer countries from controlling commodity prices
3. C) allow producer countries to control inflation by keeping commodity prices low
4. D) stabilize prices through regional alliances between producer and consumer countries

Answer: A

Diff: 2

Skill: Concept

Objective: 6

56) An example of an effective commodity agreement is ________.

1. A) the Organization of Petroleum Exporting Countries


2. B) the Organization of Petroleum Importing Countries
3. C) the International Tin Alliance
4. D) the International Cotton Alliance
Answer: A

Diff: 2

Skill: Concept

Objective: 6

57) The Organization of Petroleum Exporting Countries ________.

1. A) uses import tariffs to control oil prices


2. B) stabilizes prices based on demand
3. C) uses quotas to control oil prices
4. D) produces all of the world’s oil

Answer: C

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 6

58) Which of the following primarily triggered Toyota’s investment in the European Union?

1. A) Europeans demanded affordable, high quality cars from Japan.


2. B) A common currency gave Europeans more buying power.
3. C) The EU lowered trade barriers on foreign auto imports.
4. D) Japan and the EU formed a free trade agreement.

Answer: C

Diff: 2

Skill: Concept

Objective: 2

AACSB: Analytical thinking


59) Which of the following is Walmart’s competitive advantage in Mexico?

1. A) Walmart purchased all Mexican retail chains and eliminated competitors.


2. B) Walmart is able to transfer its “everyday low prices” concept to Mexico.
3. C) Walmart offers affordable, unique products for niche markets in Mexico.
4. D) Customers prefer to buy from American companies instead of Mexican companies.

Answer: B

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 2

60) What was the primary purpose of the formation of Sinergia?

1. A) charge tariffs on Walmart imports


2. B) purchase Walmart’s major suppliers
3. C) better compete with Walmart on price
4. D) include Walmart in the regional supply chain

Answer: C

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 2

61) Regional integration is better known as global integration through the World Trade
Organization.

Answer: FALSE

Diff: 1
Skill: Concept

Objective: 2

62) The European Union is an example of regional integration.

Answer: TRUE

Diff: 2

Skill: Concept

Objective: 2

63) As companies expand internationally, they must change their organizational structure and
operating strategies to take advantage of regional trading groups.

Answer: TRUE

Diff: 2

Skill: Concept

Objective: 2

64) Most MNEs generate a majority of their revenues in their home regions.

Answer: FALSE

Diff: 2

Skill: Concept

Objective: 2

65) GATT’s contribution to trade liberalization made possible the expansion of world trade in
the second half of the twentieth century.

Answer: TRUE
Diff: 2

Skill: Concept

Objective: 1

66) The most-favored-nation policy is a WTO privilege that allows member nations to restrict
tariff cuts to members.

Answer: FALSE

Diff: 2

Skill: Concept

Objective: 1

67) One of the reasons that neighboring countries tend to ally is similar consumer tastes.

Answer: TRUE

Diff: 1

Skill: Concept

Objective: 2

AACSB: Dynamics of the global economy

68) Most trade groups contain countries in the same area of the world, even though neighboring
countries usually lack a common history and interests.

Answer: FALSE

Diff: 2

Skill: Concept
Objective: 2

AACSB: Dynamics of the global economy

69) The goal of a free trade agreement is to abolish all tariffs among member countries.

Answer: TRUE

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 2

70) When free mobility of factors of production is added to a common market, the result is a
customs union.

Answer: FALSE

Diff: 2

Skill: Concept

Objective: 2

71) Static effects are the overall growth in the market and the impact on a company caused by
expanding production and by the company’s ability to achieve greater economies of scale.

Answer: FALSE

Diff: 1

Skill: Concept

Objective: 3
72) The shifting of resources from inefficient to efficient companies as trade barriers fall
produces static effects.

Answer: TRUE

Diff: 1

Skill: Concept

Objective: 3

73) Trade creation allows consumers access to more goods at a lower price than would have been
possible without integration.

Answer: TRUE

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 2

74) The shifting of trade to countries in a regional group at the expense of trade with countries
not in the group is known as trade internalization.

Answer: FALSE

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 2

75) The European Commission is the European Union’s ultimate decision-making body and is
composed of the different ministers of the member countries.
Answer: FALSE

Diff: 2

Skill: Concept

Objective: 5

76) The three major responsibilities of the European Parliament are legislative power, control
over the budget, and supervision of executive decisions.

Answer: TRUE

Diff: 2

Skill: Concept

Objective: 5

77) The introduction of the euro has eliminated currency as a barrier to trade in all European
countries.

Answer: FALSE

Diff: 2

Skill: Concept

Objective: 5

78) The Single European Act set steps to accomplish monetary union in the European Union,
including the creation of the euro.

Answer: FALSE

Diff: 2

Skill: Concept
Objective: 5

79) Production location is not an important choice when doing business in the European Union.

Answer: FALSE

Diff: 1

Skill: Concept

Objective: 5

80) Although the European Union is a common market, member countries have different
economic growth rates.

Answer: TRUE

Diff: 2

Skill: Concept

Objective: 5

81) NAFTA is an example of a common market.

Answer: FALSE

Diff: 2

Skill: Concept

Objective: 5

82) The most important rationales for NAFTA are geographic proximity and trading importance.

Answer: TRUE

Diff: 2

Skill: Concept
Objective: 5

83) Each country in NAFTA sets its own tariffs to the rest of the world.

Answer: TRUE

Diff: 2

Skill: Concept

Objective: 5

84) The major trade groups in South America are CAN and MERCOSUR.

Answer: TRUE

Diff: 1

Skill: Concept

Objective: 5

85) The formation of CARICOM has primarily been triggered by the desire of Jamaica, Trinidad,
and Tobago to expand the region’s market size and attract more FDI.

Answer: TRUE

Diff: 1

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 5

86) An NGO is a private institution independent from the government.


Answer: TRUE

Diff: 2

Skill: Concept

Objective: 6

87) NGOs must be recognized by the United Nations in order to do humanitarian work in
developing countries.

Answer: FALSE

Diff: 2

Skill: Application

Objective: 6

AACSB: Analytical thinking

88) Very few commodity agreements are successful in bringing together supplier and consumer
countries to stabilize commodity prices.

Answer: TRUE

Diff: 2

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Concept

Objective: 6

89) OPEC is an example of a producer’s cartel that is successful because of its ability to institute
tariffs on oil exports.

Answer: FALSE

Diff: 2

Skill: Concept
Objective: 6

90) Toyota has been successful in Europe by exporting cars to Europe as well as designing and
manufacturing cars in Europe for the European market.

Answer: TRUE

Diff: 2

Skill: Concept

Objective: 2

91) Describe the different types of regional economic integration and give an example of each
type.

Answer:

1. Free trade area (FTA): The goal of a free trade area is to abolish all tariffs among member
countries. Free trade agreements usually begin modestly by eliminating tariffs on goods that
already have low tariffs, and there is usually an implementation period over which all tariffs are
eliminated on all products. In addition, each member country maintains its own external tariffs
against non-FTA countries. Examples: the North American Free Trade Agreement, the
Association of South East Asian Nations
2. Customs union: In addition to eliminating internal tariffs, member countries levy a common
external tariff on goods being imported from nonmembers. Example: MERCOSUR
3. Common market: A common market has all the elements of a customs union, plus it allows free
mobility of production factors such as labor and capital. Example: the European Union

Diff: 3

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Application

Objective: 4

AACSB: Reflective thinking


92) Explain the static effects and dynamic effects of economic integration. What is the difference
between trade creation and trade diversion resulting from economic integration?

Answer: Static effects are the shifting of resources from inefficient to efficient companies as
trade barriers fall. Dynamic effects are the overall growth in the market and the impact on a
company of expanding production and achieving greater economies of scale. Static effects may
develop when either of two conditions occurs:

1. Trade creation: Production shifts to more efficient producers for reasons of comparative
advantage, allowing consumers access to more goods at a lower price than would have been
possible without integration.
2. Trade diversion: Trade shifts to countries in the group at the expense of trade with countries not
in the group, even though the nonmember company might be more efficient in the absence of
trade barriers.

Dynamic effects of integration occur when trade barriers come down and the size of the market
increases, allowing companies to achieve economies of scale.

Diff: 3

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Critical Thinking

Objective: 3

AACSB: Analytical thinking

93) What are the functions of the European Commission, the European Parliament, the Council,
and the European Court of Justice?

Answer:

1. The European Commission provides the European Union’s political leadership and direction. The
commission is composed of commissioners nominated by each member government and
approved by the European Parliament. It drafts laws that it submits to the European Parliament
and Council of the EU.
2. The three major responsibilities of the European Parliament are: legislative power, control over
the budget, and supervision of executive decisions. The commission presents community
legislation to the parliament. Parliament may approve legislation, amend it, or reject it outright.
Parliament also approves the EU’s budget each year and monitors spending.
3. The Council is composed of the ministers of the member countries. The Council passes laws and
makes and enacts major policies. It works closely with the Commission and Parliament in
adopting policies.
4. The European Court of Justice ensures consistent interpretation and application of EU treaties.
Member states, community institutions, or individuals and companies may bring cases to the
court. The Court of Justice is an appeals court for individuals, firms, and organizations fined by
the commission for infringing treaty law. The Court of Justice is relevant to MNEs because it
deals mostly with economic matters.

Diff: 3

Skill: Application

Objective: 5

AACSB: Analytical thinking

94) What are the rules of origin and regional content provisions of NAFTA?

Answer: Because NAFTA is a free trade agreement and not a customs union, each country sets
its own tariffs for the rest of the world. Rules of origin ensure that only goods that have been the
subject of substantial economic activity within the free trade area are eligible for the more liberal
tariff conditions created by NAFTA. According to regional content rules, at least 50 percent of
the net cost of most products must come from the NAFTA region. The exceptions are 55 percent
for footwear, 62.5 percent for passenger automobiles and light trucks and the engines and
transmissions for such vehicles, and 60 percent for other vehicles and automotive parts.

Diff: 3

Skill: Application

Objective: 5

AACSB: Analytical thinking

95) What has been the impact of NAFTA on trade and employment in NAFTA nations?

Answer: Trade and investment among the NAFTA members has increased significantly since
the agreement was signed in 1994. The U.S. is the largest trade partner of Canada and Mexico,
and both countries are among the most important exporters and importers for the U.S. Due to
lower wages in Mexico, a lot of FDI has poured into Mexico, potentially displacing jobs in the
United States. U.S. firms have come under criticism for taking advantage of cheaper wages and
lax environmental standards. In addition, the agreement has not stopped the flow of illegal
immigrants from Mexico to the U.S.

Diff: 3

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Synthesis

Objective: 2, 5

AACSB: Reflective thinking

96) Identify and briefly compare the major regional trading groups in Latin America, Asia, and
Africa.

Answer:

1. The major trade group in South America is MERCOSUR. In 1991, Brazil, Argentina, Paraguay, and
Uruguay established MERCOSUR. MERCOSUR is significant because of its size; it generates 75
percent of South America’s GNP. Another major group in South America is the Andean Group
(CAN), which is composed of Bolivia, Colombia, Ecuador, and Peru. There are three major
regional trading groups in Central America and the Caribbean: the Central American Common
Market, the Central American Free Trade Agreement-Dominican Republic (which includes the
United States), and the Caribbean Community and Common Market (CARICOM). These groups
are hampered by their small markets and dependence on the United States for trade.
2. In Asia, the key group is the Association of South East Asian Nations (ASEAN), which was
organized in 1967 and comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the
Philippines, Singapore, Thailand, and Vietnam. It is promoting cooperation in many areas,
including industry and trade. In 1993, the ASEAN countries formed the ASEAN Free Trade Area
(AFTA) to deal with the specific intrazonal trade issues.
3. The Asia Pacific Economic Cooperation (APEC) is massive since it includes every country that
borders the Pacific Ocean. In spite of the size of APEC, it does not engage in treaties like the
other trade agreements, so it has potential but not much teeth.
4. Africa is divided into many different trading groups based on geographic proximity and links to
former colonial powers. Most groups are hampered by poverty, small market size, and
dependence on former colonial powers. The African Union is modeled loosely on the EU, but
that type of integration will likely be very difficult.

Diff: 3

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Critical Thinking

Objective: 5
AACSB: Analytical thinking

97) Are commodity agreements effective? Why or why not?

Answer: Commodity agreements used to be influential in helping to stabilize commodity prices,


but now they are more involved in disseminating information and promoting research. OPEC is
an example of an effective producers’ cartel that operates on quotas to try to stabilize prices. In
general, very little can be done outside of market forces to influence price.

Diff: 3

Skill: Critical Thinking

Objective: 6

AACSB: Reflective thinking

98) Why is geography important to most regional trade agreements? Provide examples of RTAs
to illustrate your answer.

Answer: There are a number of reasons why geography matters in the case of RTAs.
Neighboring countries often, though not always, share a common history, language, culture, and
currency. Unless the countries are at war with each other, they usually have already developed
trading ties. Close proximity reduces transportation costs, thereby making traded products
cheaper in general. Armenia has RTAs in force with Kazakhstan, Moldova, the Russian
Federation, Turkmenistan, and Ukraine. India has a number of trade agreements with most of the
countries in its region. Germany, a member of the European Union, exports 62.9 percent of its
merchandise exports to other EU members and imports 58.3 percent from them. Switzerland,
which is not a member of the EU but which has a trade agreement with the EU, exports 59.7
percent of its merchandise exports to EU countries and imports 78 percent from them. NAFTA
includes Canada, the United States, and Mexico.

Diff: 3

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Synthesis

Objective: 2, 5
99) In a brief essay, explain the roles of the World Trade Organization and the United Nations in
international trade.

Answer: The World Trade Organization (WTO) replaced GATT in 1995 as a continuing means
of trade negotiations that aspires to foster the principle of trade without discrimination and to
provide a better means of mediating trade disputes and of enforcing agreements. The United
Nations is composed of representatives of most of the countries in the world and influences
international trade and development in a number of significant ways. The UN family of
organizations is too large to list, but it includes the WTO, the International Monetary Fund, and
the World Bank. If the UN performs its responsibilities, it should improve the environment in
which MNEs operate around the world, reducing risk and providing greater opportunities.

Diff: 3

Skill: Synthesis

Objective: 1, 6

AACSB: Dynamics of the global economy

100) What is the difference between a free trade agreement and a customs union? Provide
examples of each in your answer.

Answer: The goal of an FTA is to abolish all tariffs between member countries. It usually begins
modestly by eliminating tariffs on goods that already have low tariffs, and there is usually an
implementation period during which all tariffs are eliminated on all products. Moreover, each
member country maintains its own external tariffs against non-FTA countries. NAFTA is an
example of a free trade agreement. The EU is considered a customs union by the WTO. In
addition to eliminating internal tariffs, member countries levy a common external tariff on goods
being imported from nonmembers. For example, the EU removed internal tariffs from 1959 to
1967, when it established a common external tariff. Now it negotiates as one region in the WTO
rather than as separate countries. Customs unions account for less than 10 percent of the RTAs
identified by the WTO.

Diff: 3

Learning Outcome: Discuss arguments for and against regional economic integration

Skill: Synthesis

Objective: 4, 5
AACSB: Dynamics of the global economy