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International Business: The New Realities, 3e (Cavusgil)
Chapter 8 Government Intervention in International Business
1) Governments intervene in international trade and investments in order to protect the interests
of foreign investment firms.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-1
AACSB: Dynamics of the global economy
2) Investment barriers is an example of commercial risk in the context of international business.

Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-1
3) A nontariff trade barrier is a government policy, regulation, or procedure that impedes trade
through means other than explicit tariffs.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 8-1
4) Governments impose offensive barriers to safeguard industries, workers, and special interest
groups and to promote national security.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-2
5) Governments impose defensive barriers to pursue strategic or public policy objectives, such as
increasing employment or generating tax revenues.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-2
1
Copyright © 2014 Pearson Education, Inc.
6) Governments often impose trade barriers to restrict imports of products or services seen to
threaten national assets.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 8-2
7) Nations with economies based on agriculture and textile manufacturing generate more
economic revenue than do nations with many high-tech industries.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-2
8) A revenue tariff aims to protect domestic industries from foreign competition.

Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-3
9) Anti-dumping duty reduces or eliminates the competitive advantage of imported products

priced at abnormally low levels.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 8-3
10) A countervailing duty slows the import of products or services and hinders the investment
activities of firms.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-3
11) FDI and ownership restrictions increase the competitive advantage of foreigners while
diminishing that of the local firms.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-3
2
12) Currency controls harm companies that export their products from the host country, but favor
those that rely heavily on imported parts and components.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-3
13) Subsidies may allow a manufacturer to practice dumping—that is, to charge an unusually
low price for exported products.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 8-3
14) Dumping violates WTO rules because it amounts to unfair competition.

Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 8-3
15) Increasing trade barriers are a major factor in the growth of developing nations and global
commerce.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-4
16) Economic freedom flourishes when government supports the institutions necessary for that
freedom and provides an appropriate level of intervention and regulation.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 8-4
17) Economic freedom of a nation is based on the military capability, environmental wellness,
and income of citizens.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-4
3
18) Subsidies can help counterbalance harmful consequences that disproportionately affect the
poor.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 8-4
19) Import substitution refers to substituting exports for imports.

Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-5
20) Export-led development refers to government policies that impose high tariffs and quotas on
imports from the developed world.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-5
21) Singapore and South Korea used export-led development to achieve high growth from the
1970s onward.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 8-5
22) The WTO was created in 1947 to reduce tariffs through continuous negotiations among
member nations.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-5
23) The GATT created a forum for resolving trade disputes.

Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 8-5
4
24) The recent global recession and financial crisis arose largely from inadequate regulation and
insufficient enforcement of current regulations in the banking and finance sectors.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 8-5
25) Tariffs and most nontariff trade barriers apply to FDI, whereas investment barriers apply to
exporting.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-6
26) If high tariffs are present, managers should consider other strategies, such as FDI, licensing,
and joint ventures that allow the firm to operate directly in the target market, avoiding import
barriers.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 8-6
27) Tariffs rarely vary with the form of an imported product.

Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-6
28) Maquiladoras refer to export-assembly plants in northern Mexico along the U.S. border that
produce components and typically finished products destined for the United States on a tariff-
free basis.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 8-6
5
29) One approach for reducing exposure to trade barriers is to have exported products classified
in the appropriate harmonized product code.
Answer: TRUE
Difficulty: Easy
Skill: Concept
Objective: 8-6
30) Obtaining economic development incentives from host- or home-country governments

increases the cost of trade and investment barriers.
Answer: FALSE
Difficulty: Easy
Skill: Concept
Objective: 8-6
31) ________ is at odds with free trade, the unrestricted flow of products, services, and capital
across national borders.
A) Lower-cost import
B) Government intervention
C) FDI
D) Factors of production
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 8-1
32) Which of the following situations is an example of country risk?

A) Fiesta Corp. is an automobile manufacturer based in the U.S. The company's negotiation
attempts with China to open a manufacturing factory in Beijing failed owing to cultural
differences.
B) Frostees Inc. is a food and beverages company based in the U.S. Its attempt to set up an outlet
in Thailand failed primarily owing to a misinterpretation of the memorandum of understanding
by a potential business partner in Thailand.
C) Alpha Corp., a rice manufacturer based in Pakistan, suffered losses when the U.S. Department
of Commerce decided to impose tariffs on the import of paddy rice to avoid competition for the
domestic industry.
D) Tamiaz LLC is a U.S. based manufacturer of clothing with outlets in China, Vietnam, and
India. The company incurred a loss due to delayed payments from India owing to fluctuations in
the currency exchange rates.
Answer: C
Difficulty: Moderate
Skill: Application
Objective: 8-1
AACSB: Dynamics of the global economy; Analytic skills
6
33) The purpose of protectionism is to protect ________.
A) domestic industries from foreign competitors
B) foreign firms from domestic competition
C) domestic exports from high production costs
D) foreign and domestic firms from labor unions
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 8-1
34) ________ are checkpoints at the ports of entry in each country where government officials
inspect imported products and levy tariffs.
A) Nontariff trade barriers
B) Customs
C) Quotas
D) Subsidies
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 8-1
35) A government policy that impedes trade through means other than explicit tariffs is known as
a(n) ________.
A) investment incentive
B) subsidy
C) maquiladora
D) nontariff trade barrier
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 8-1
36) Which of the following refers to an often-used form of nontariff trade barrier?
A) premium
B) subsidy
C) quota
D) grant
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 8-1
7
37) A quantitative restriction on specific imports for a set period of time is referred to as
________.
A) tariff
B) quota
C) investment barrier
D) country risk
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 8-1
38) Which of the following is an example of nontariff trade barrier?

A) Gayle Inc. is a U.S.-based retailer that imports cosmetic products manufactured in Thailand.
These products pass through U.S. customs and are subject to a 5 percent import duty.
B) The U.S. imports chocolates manufactured in Belgium that cost $65 a box with taxes.
C) The U.S. Department of Commerce announced that white sugar imports will be limited to
7,500 million tons.
D) Spices imported from India to the U.S. for sale in the domestic market are subject to a 10
percent import duty.
Answer: C
Skill: Application
Objective: 8-1
39) Which of the following is NOT a country risk in international business?

A) government policies that favor domestic firms
B) investment barriers
C) government protectionism
D) currency exchange rate
Answer: D
Difficulty: Easy
Skill: Application
Objective: 8-1
40) Which of the following is often a result of protectionist policies?

A) price inflation
B) increased choices for buyers
C) easy availability of products
D) high incentive to improve quality
Answer: A
Skill: Application
Objective: 8-1
8
41) Governments impose offensive barriers to ________.
A) protect domestic industries
B) promote national security
C) increase employment
D) safeguard the interests of special interest groups
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 8-2
42) Governments impose defensive barriers to ________.

A) generate tax revenues
B) increase employment
C) pursue strategic policy objectives
D) promote national security
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 8-2
43) Blocking imports ________.

A) increases the availability of raw materials
B) increases the availability of products sold in the home market
C) reduces the availability of products sold in the home market
D) decreases the cost of products sold in the home market
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 8-2
44) Which of the following is true with regard to protectionism?

A) It increases the availability of raw materials for domestic industries.
B) It decreases the cost of products sold in the home market.
C) It increases the availability of products sold in the home market.
D) It can trigger retaliation from foreign governments, which reduces sales prospects for exports.
Answer: D
Skill: Concept
Objective: 8-2
9
45) Which of the following statements is true about protection of an infant industry?
A) Governments can impose temporary trade barriers on foreign imports to ensure that young
firms gain a large share of the domestic market.
B) Such protection is easy to remove.
C) Protected companies become more efficient and produce products with lower prices.
D) Protecting infant industries rarely allows countries to develop a modern industrial sector.
Answer: A
Skill: Concept
Objective: 8-2
46) ________ refers to a government measure intended to manage or prevent the export of
certain products or trade with certain countries.
A) Quota
B) Export control
C) Customs
D) Subsidy
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 8-2
47) Governments impose export controls for the purpose of ________.

A) improving available opportunities for domestic sales
B) boosting derived demand in the domestic market
C) preventing the export of certain products to certain countries
D) boosting derived demand in foreign markets
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 8-2
10
48) Which of the following is an example of an offensive rationale for government intervention?
A) The government of Erbia imposes trade restrictions on the export of plutonium to certain
countries.
B) The government of Berylia imposes a trade barrier to curtail the import of low-priced
products from manufacturers in the developed economies.
C) The government of Argonia imposes investment barriers to safeguard special interest groups.
D) The government of Rhodia requires foreign companies to enter its huge markets through joint
ventures with local firms.
Answer: D
Skill: Application
Objective: 8-2
49) Advocates of government intervention in international trade argue that blocking imports will
________.
A) reduce the availability of products sold in the home market
B) protect home-country employment opportunities
C) encourage manufacturers to outsource jobs
D) limit intellectual property theft
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 8-2
50) The Chinese government's policy of requiring foreign firms to enter the Chinese market via
joint ventures is intended to ________.
A) limit the amount of FDI
B) create jobs for Chinese workers
C) protect China's national security
D) stimulate foreign investment
Answer: B
Difficulty: Easy
Skill: Application
Objective: 8-2
11
51) The United Nations estimated that trade barriers alone cost developing countries ________
in lost trading opportunities with developed countries every year.
A) $100 billion
B) $200 billion
C) less than $100 billion
D) more than $500 billion
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 8-3
52) Typically, administrative and bureaucratic procedures ________.

A) speed up the investment activities of firms
B) slow the import of products or services
C) boost investment activities
D) harm late importers
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 8-3
53) ________ refer to rules that limit the ability of foreign firms to invest in certain industries or
acquire local firms.
A) Quotas
B) Regulations and technical standards
C) FDI and ownership restrictions
D) Administrative and bureaucratic procedures
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 8-3
54) In Cadmia, foreign-owned automobile manufacturing companies must be managed by a

Cadmian national and most board members must be Cadmian citizens. This exemplify
________.
A) FDI and ownership restrictions
B) administrative and bureaucratic procedures
C) Regulations and technical standards
D) Anti-dumping duty
Answer: A
Skill: Application
Objective: 8-3
12
55) Products are classified under about 8,000 different unique codes in the ________ schedule, a
standardized system used worldwide.
A) harmonized tariff
B) protective tariff
C) revenue tariff
D) specific tariff
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 8-3
56) Tariffs that are ad valorem are ________.

A) based on the weight or size of the imported product
B) assessed as a percentage of the imported product's value
C) intended to provide a steady flow of income for the government
D) charged regardless of the imported product's value
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 8-3
57) Under the ________, Canada, Mexico, and the United States have eliminated nearly all
tariffs on product imports from each other.
A) APEC
B) FTAAP
C) GATT
D) NAFTA
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 8-3
58) ________ represent a major driver of market globalization.

A) Continuous reductions
B) Export controls
C) Import controls
D) Prohibitive tariffs
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 8-3
13
59) Nontariff trade barriers have increased in popularity partly because they ________.
A) generate profits for foreign firms
B) are easier to conceal from the WTO
C) restrict trade by imposing direct tax
D) have been fairly successful in eliminating smuggling along international borders
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 8-3
60) An import license refers to a(n) ________.

A) tax charged on an imported product whose price is below usual prices in the local market
B) list of complex procedures imposed on importers that hinder trade and investment
C) complicated system of establishing quotas
D) government authorization granted to a firm for importing a product
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 8-3
61) The so-called ________ specifies that a certain proportion of products and supplies, or of
intermediate goods used in local manufacturing, must be produced within the bloc.
A) safe harbor
B) local content requirement
C) rules of origin requirement
D) ad valorem tariff
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 8-3
62) Which of the following is a frequent problem in national customs agencies?

A) a shortage of customs agents in airports
B) ambiguous product classification
C) arbitrary tariffs and duties
D) lack of understanding of contemporary trade issues among customs agents
Answer: B
Difficulty: Easy
Skill: Application
Objective: 8-3
14
63) Restrictions on the outflow of hard currency from a country or on the inflow of foreign
currencies is called ________.
A) antidumping duty
B) currency appreciation
C) currency control
D) currency depreciation
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 8-3
64) Governments sometimes retaliate against subsidies by imposing ________, tariffs on

products imported into a country to offset subsidies given to producers or exporters in the
exporting country.
A) local content requirements
B) investment incentives
C) countervailing duties
D) antidumping duties
Answer: C
Difficulty: Easy
Skill: Application
Objective: 8-3
65) Which of the following may allow a manufacturer to practice dumping?

A) countervailing duties
B) subsidies
C) currency control
D) import license
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 8-3
15
66) Which of the following exemplifies local content requirements?
A) Titania charges a 27 percent tariff on imported dairy products.
B) At least 40 percent of the value of all computers assembled in Titania must be from parts or
other inputs produced in Titania.
C) Titania bans imports of firearms.
D) Titania imposes extensive inspections and bureaucratic procedures on the import of alcoholic
beverages.
Answer: B
Skill: Application
Objective: 8-3
67) ________ are transfer payments or tax concessions made directly to foreign firms to entice
them to invest in the country.
A) Investment incentives
B) Antidumping duties
C) Countervailing duties
D) Quotas
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 8-3
68) By adopting procurement policies, governments ________.

A) incentivize dumping
B) increase the costs of production of domestic industries
C) alienate domestic industries
D) restrict purchases to home-country suppliers
Answer: D
Skill: Concept
Objective: 8-3
16
69) Which of the following is true about a nation's level of economic freedom?
A) One way of evaluating the effects of government intervention is to examine each nation's
level of economic freedom.
B) Economic freedom reflects the estimated value of the total worth of a country's production
and services.
C) Economic freedom flourishes only in the total absence of governmental intervention and
regulation.
D) All advanced economies and emerging markets are characterized by a low degree of
economic freedom.
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 8-4
Cotton Quota (Scenario)

Cotton growers in the nation of Zanzi export nearly 700,000 bales of cotton every year. Zanzi is
the home country for a fabric manufacturing facility that exports high-quality cotton fabric
around the world. The government imposed a quota of 1 million bales of cotton that can be
imported into Zanzi every year. The local fabric manufacturer is lobbying the government to
remove the quota on cotton.
70) Which of the following questions would be most important for government officials to
evaluate when considering the controversy over the cotton quota?
A) What would be the short-term effect of additional agricultural quotas?
B) What other nations utilize agricultural quotas and what are the effects?
C) Does the government of Zanzi impose heavy duties on dumping?
D) What will be the long-term effect of the cotton quota on the Zanzi economy?
Answer: D
Skill: Critical Thinking
Objective: 8-3
AACSB: Dynamics of the global economy; Reflective thinking skills
71) Which of the following most supports abolishing the cotton quota over maintaining it?
A) The cotton growers have a competitive edge over foreign cotton growers, and they are
profitable.
B) The fabric manufacturer, a prime contributor to the nation's annual revenue, can earn better
returns by shifting to another country that does not impose cotton quotas.
C) A competing fabric manufacturer is considering opening a production facility in Zanzi.
D) The price of cotton fabric has remain unchanged over the last decade.
Answer: B
Objective: 8-3
17
72) Which of the following best supports maintaining the existing cotton quota?
A) Zanzi cotton growers are protected from cheaper cotton imports.
B) Zanzi cotton growers have an advantage when they export cotton fabric to other countries.
C) The local fabric manufacturer pays high prices for cotton.
D) The local fabric manufacturer uses mostly Zanzi-grown cotton.
Answer: A
Objective: 8-3
73) Which of the following criteria is used to evaluate a country's Index of Economic Freedom?
A) environmental wellness
B) military capability
C) level of trade barriers
D) income of non-residents located in that country
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 8-4
74) Which of the following countries has the highest degree of economic freedom?
A) Australia
B) China
C) Brazil
D) Venezuela
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 8-4
75) Which of the following countries has the lowest degree of economic freedom?
A) South Korea
B) Mexico
C) North Korea
D) Botswana
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 8-4
18
76) What is the primary ethical concern regarding the import of products from poor countries?
A) Higher tariffs hurt poor nations more than developed nations.
B) Nations lacking economic freedom cannot afford to export.
C) Emerging nations use government intervention to protect domestic industries.
D) Lack of subsidies adversely affect poor countries.
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 8-4
AACSB: Dynamics of the global economy; Ethical understanding and reasoning abilities
77) In 1938, the United States passed the Smoot-Hawley Tariff Act, which ________.
A) opened foreign markets for U.S. agricultural products
B) led to the consolidation of the U.S. banking system
C) instituted strict regulations to contain intellectual property theft
D) raised U.S. tariffs to near-record highs of more than 50 percent
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 8-5
78) Import substitution failed during the 1950s in Latin America because ________.
A) domestic companies felt exposed to the threats of foreign competition
B) protected enterprises required constant subsidizing and never competed globally
C) high quotas and tariffs did not generate enough revenue to support the government
D) local manufacturing firms required parts and labor from other nations
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 8-5
79) In the 1950s, ________ adopted protectionist policies aimed at industrialization and
economic development.
A) Latin America
B) Singapore
C) Africa
D) South Korea
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 8-5
19
80) Which of the following Asian countries had launched an ambitious program of
industrialization and export-led development that contributed to its rise from poverty in the
1940s to one of the world's wealthiest countries by the 1980s?
A) Indonesia
B) China
C) Japan
D) India
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 8-5
81) Which of the following was the first major effort to systematically reduce trade barriers
worldwide?
A) WIPO
B) GATT
C) NAFTA
D) WTO
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 8-5
20
International Trade History (Scenario)
The history of international trade is the subject of a report presented by Patrick Hinojosa to his
international business class. Patrick addressed how the GATT impacted world trade, and how
trade barriers have gradually disappeared. He described the protectionist policies implemented
by Latin America during the 1950s. Patrick wrapped up his report by citing the rapid economic
growth of Singapore, Hong Kong, and Taiwan during the 1970s and the post-World War II
Japanese miracle.
82) Which of the following is Patrick most likely to cite as the policy implemented in Latin
America that was intended to spur industrialization and economic growth?
A) export controls
B) import quotas
C) government subsidies
D) import substitution
Answer: D
Skill: Concept
Objective: 8-5
83) Patrick's research is most likely to indicate the ________ as the reason for the rapid
economic growth achieved by Singapore, Hong Kong, and Taiwan from the 1970s onward.
A) development of export-intensive industries
B) expansion of import-driven industries
C) chiefly monopolistic nature of the markets
D) rise of subsidized industries
Answer: A
Skill: Concept
Objective: 8-5
84) Which of the following best describes the "Japanese miracle" cited by Patrick in his report?
A) Japan's rise as a major nuclear power in the latter half of the twentieth century
B) the phenomenal success of foreign MNCs in Japan
C) Japan's rise from poverty in the 1940s to one of the world's wealthiest countries by the 1980s
D) the success of small firms in Japan prior to the 1940s
Answer: C
Skill: Concept
Objective: 8-5
21
85) Which of the following entry strategies do most firms use in the absence of high tariffs?
A) FDI
B) licensing
C) joint ventures
D) exporting
Answer: D
Difficulty: Easy
Skill: Concept
Objective: 8-6
86) Which of the following is a method used by some manufacturers to avoid paying high
tariffs?
A) assemble products in the target market
B) produce a large number of less expensive items in the target market
C) employ highly skilled workers in the export location regardless of the cost
D) ship products to fewer international locations
Answer: A
Difficulty: Easy
Skill: Concept
Objective: 8-6
87) Firms use foreign trade zones to ________.

A) consolidate market monopolies
B) assemble foreign dutiable materials and components into finished products, which are then re-
exported
C) create employment opportunities for the local people
D) meet quota demands established by the government
Answer: B
Difficulty: Easy
Skill: Concept
Objective: 8-6
88) A ________ is an area within a country that receives imported goods for assembly or other
processing and subsequent re-export.
A) single market
B) trade bloc
C) foreign trade zone
D) common market
Answer: C
Difficulty: Easy
Skill: Concept
Objective: 8-6
22
Minimizing Trade Barriers (Scenario)
National Appliance Corporation (NAC) needs to build a new manufacturing facility to meet the
increasing demand for professional-grade appliances. NAC managers are considering building
the facility in Mexico but are hesitant because of the high tariffs involved. Another possible
location for the facility is India; however, the country also imposes high tariffs. Wherever NAC
builds a plant, parts will need to be imported from other nations.
89) Which of the following would be most important for NAC managers to consider while taking
a decision in favor of building a facility in Mexico or India?
A) Has NAC engaged in dumping in the past?
B) How would appliance parts and finished products be categorized when passing through
customs?
C) Is employee empowerment culturally favored in Mexico and India?
D) What entry strategies are available in both countries which would allow NAC to minimize
import barriers?
Answer: D
Objective: 8-6
90) Given the high trade barriers in Mexico, the management of NAC is most likely to consider
________ to be an inappropriate entry strategy.
A) exporting
B) FDI
C) joint ventures
D) licensing
Answer: A
Skill: Concept
Objective: 8-6
91) Which of the following must NAC ensure in order to reduce exposure to trade barriers?
A) reduced production
B) strong emphasis on quality
C) accurate product classification
D) obtaining patents for inventions
Answer: C
Skill: Concept
Objective: 8-6
23
92) In a short essay, describe two methods of government intervention and explain the four main
motives for government intervention in international trade and investment activities.
Answer: Government intervention is often motivated by protectionism. Protectionism refers to
national economic policies designed to restrict free trade and protect domestic industries from
foreign competition. Protectionism is typically manifested by tariffs, nontariff barriers such as
quotas, and arbitrary administrative rules designed to discourage imports. A tariff is a tax
imposed by government on imported products, effectively increasing cost of acquisition for the
customer. A nontariff trade barrier is a government policy, regulation, or procedure that impedes
trade through means other than explicit tariffs.
Governments impose trade and investment barriers to achieve political, social, or economic
objectives. Such barriers are either defensive or offensive. A key rationale is the protection of the
nation's economy, its industries, and its workers.
In the broadest terms, there are four main motives for government intervention. First, tariffs and
other forms of intervention can generate much revenue. For example, Ghana and Sierra Leone
generate more than 25 percent of total government revenue from tariffs. Second, intervention can
ensure the safety, security, and welfare of citizens. For example, governments may pass laws to
ensure a safe food supply and prevent sales of products that threaten public safety. Third,
intervention can help a government pursue economic, political, or social objectives. For example,
a government may enact policies that aim to increase national employment or promote economic
growth. Fourth, intervention can help better serve the interests of the nation's firms and
industries. For example, a government may devise regulations to stimulate development of
home-grown industries.
Skill: Synthesis
Objective: 8-1, 8-2
93) In a short essay, describe the negative effects to the economy when a government intervenes
in international trade.
Answer: Critics counter that protectionism is at odds with the theory of comparative advantage,
according to which nations should engage in more international trade, not less. Trade barriers
interfere with country-specific specialization of labor. When countries specialize in the products
that they can produce best and then trade for the rest, they perform better in the long run,
delivering superior living standards to their citizens. Critics also charge that blocking imports
reduces the availability and increases the cost of products sold in the home market. Industries
cannot access all the input products they need. Finally, protection can trigger retaliation, whereby
foreign governments impose their own trade barriers, reducing sales prospects for exporters.
Skill: Concept
Objective: 8-2
24
94) In a short essay, explain why agricultural subsidies have been implemented in Europe and
the United States. What are the criticisms to these subsidies?
Answer: In Europe and the United States, governments frequently provide agricultural subsidies
to supplement the income of farmers and help manage the supply of agricultural commodities.
The U.S. government grants subsidies for more than two dozen commodities, including corn,
soybeans, wheat, cotton, and rice. In Europe, the Common Agricultural Policy (CAP) is a system
of subsidies that represents about 40 percent of the EU's budget, amounting to tens of billions of
euros annually. The CAP and U.S. subsidies have been criticized for promoting unfair
competition and high prices because they tend to prevent developing economies from exporting
their agricultural goods to Europe and the United States. Subsidies encourage overproduction
and therefore lower food prices at home, making agricultural imports from developing countries
less competitive.
Difficulty: Easy
Skill: Concept
Objective: 8-3
95) How can government intervention in the form of subsidies be utilized to help low-income
groups? Explain with suitable example.
Answer: Governments can use trade barriers to create or protect jobs that increase living
standards for low-income groups. Governments provide subsidies that help counterbalance
harmful consequences that disproportionately affect the poor. In Denmark, for example,
globalization has affected thousands of workers whose jobs have been shifted to other countries
with lower labor costs. The Danish government provides generous subsidies to the unemployed
aimed at retraining workers to upgrade their job skills or find work in other fields.
Skill: Concept
Objective: 8-4
25
96) Import tariffs are a principle instrument of trade intervention. In a short essay, briefly
describe the five main types of import tariffs, and discuss the main consequences of government
intervention.
Answer: The most common type of tariff is the import tariff, a tax levied on imported products.
Import tariffs are usually ad valorem—that is, they are assessed as a percentage of the value of
the imported product. Or a government may impose a specific tariff—a flat fee or fixed amount
per unit of the imported product—based on weight, volume, or surface area, such as barrels of oil
or square meters of fabric. A revenue tariff is intended to raise money for the government. A
tariff on cigarette imports, for example, produces a steady flow of revenue. A protective tariff
aims to protect domestic industries from foreign competition. A prohibitive tariff is one so high
that no one can import any of the items.
One way of evaluating the effects of government intervention is to examine each nation's level of
economic freedom, defined as the "absence of government coercion or constraint on the
production, distribution, or consumption of goods and services beyond the extent necessary for
citizens to protect and maintain liberty itself. In other words, people are free to work, produce,
consume, and invest in the ways they feel are most productive."
Government intervention in international trade has several consequences. Economic freedom

flourishes when government supports the institutions necessary for that freedom and provides an
appropriate level of intervention and regulation. In 2010 for the first time, the United States fell
into the second highest category, due to increased U.S. federal government intervention in that
nation's economy, following the recent global financial crisis.
Government intervention and trade barriers raise ethical concerns for developing economies. For
example, United States import tariffs on clothing and shoes often exceed 20 percent. In 2008,
duties on imported clothing alone produced $10 billion in revenue for the U.S. government. The
tariffs hurt poor countries like Bangladesh, Pakistan, India, and several nations in Africa, where
clothing and shoe exporters are concentrated. The tariffs that confront such nations are often
several times those faced by the richest countries.
Government intervention can also offset harmful effects. For example, trade barriers can create
or protect jobs. Subsidies can help counterbalance harmful consequences that disproportionately
affect the poor. In Denmark, for example, globalization has affected thousands of workers whose
jobs have been shifted to other countries with lower labor costs. The Danish government
provides generous subsidies to the unemployed, aimed at retraining workers to upgrade their job
skills or find work in other fields.
Skill: Synthesis
Objective: 8-3, 8-4
26
97) In a short essay, explain how the GATT changed international trade.
Answer: In 1947, twenty-three nations signed the General Agreements on Tariffs and Trade
(GATT), the first global effort to systematically reduce trade barriers worldwide. The
organization proved extremely effective and resulted in the greatest global decline in trade
barriers in history.
The GATT created: (1) a process to reduce tariffs through continuous negotiations among
member nations; (2) an agency to serve as a watchdog over world trade; (3) a forum for
resolving trade disputes.
The GATT introduced the concept of most favored nation (renamed normal trade relations in
1998), according to which each signatory nation agreed to extend the tariff reductions covered in
a trade agreement with a trading partner to all other countries. Thus, a concession to one country
became a concession to all.
Skill: Concept
Objective: 8-5
98) How are investment-based entry strategies affected by tariffs? What do companies do to
minimize tariff costs?
Answer: Even investment-based entry is affected by tariffs if it requires importing raw materials
and parts to manufacture finished products in the host country. Tariffs usually vary with the form
of an imported product.
To minimize tariff costs, many companies ship manufactured products "knocked-down" and
assemble them in the target market. In countries with relatively high tariffs on imported personal
computers, importers often bring in the parts and assemble the computers locally. Eastman
Kodak imports parts and components into the United States, which it then uses to manufacture
photographic equipment. Kodak could produce the finished equipment abroad, but the tariff on
parts and components is lower. By manufacturing in the United States, Kodak avoids paying
higher tariffs.
Skill: Concept
Objective: 8-6
27
99) What is a foreign trade zone (FTZ)? In a short essay, explain how FTZs are utilized by firms.
Answer: A foreign trade zone is an area within countries that receives imported goods for
assembly or other processing and re-export. For customs purposes the FTZ is treated as if it is
outside the country's borders. Products brought into an FTZ are not subject to duties, taxes, or
quotas until they, or the products made from them, enter into the non-FTZ commercial territory
of the country where the FTZ is located. Firms use FTZs to assemble foreign dutiable materials
and components into finished products, which are then re-exported. Alternatively, firms may use
FTZs to manage inventory of parts, components, or finished products that the firm will need
eventually at some other location. Some firms obtain FTZ status within their own physical
facilities. In the United States, for example, Japanese carmakers store vehicles at the Port of
Jacksonville, Florida. The cars remain in the Jacksonville FTZ without having to pay duties until
they are shipped to U.S. dealerships.
Skill: Concept
Objective: 8-6
100) In a short essay, explain the consequences of the 1938 Smoot-Hawley Tariff Act and the
succeeding evolution of government intervention, up until the birth of the WTO. How has the
recent global financial crisis led to a gradual increase of government intervention?
Answer: In 1938, the United States passed the Smoot-Hawley Tariff Act, which raised U.S.
tariffs to near-record highs of more than 50 percent, compared to only about 4 percent today.
Tariffs that other countries imposed to retaliate against Smoot-Hawley choked off foreign
markets for U.S. agricultural products, leading to plummeting farm prices and many bank
failures. In an effort to revive trade, the U.S. government began to reduce restrictive tariffs. By
the late 1940s, prudent policymaking had begun to substantially reduce tariffs worldwide.
In 1947, twenty-three nations signed the General Agreements on Tariffs and Trade (GATT), the
first major effort to systematically reduce trade barriers worldwide. The GATT created: (1) a
process to reduce tariffs through continuous negotiations among member nations, (2) an agency
to serve as watchdog over world trade, and (3) a forum for resolving trade disputes. The GATT
introduced the concept of most favored nation (renamed normal trade relations in 1998),
according to which each signatory nation agreed to extend the tariff reductions covered in a trade
agreement with a trading partner to all other countries. Thus, a concession to one country became
a concession to all. Eventually, the GATT was superseded by the WTO in 1995 and grew to
include about 150 member nations. The organization proved extremely effective and resulted in
the greatest global decline in trade barriers in history.
28
The recent global recession and financial crisis have raised new questions about government's
role in business and the world economy. The crisis arose largely from inadequate regulation and
enforcement of current regulations in the banking and finance sectors. In response, governments
worldwide are increasing regulation and examining ways to improve enforcement. For example,
the U.S. government has increased the power of its Treasury Department, Federal Reserve
System, and Federal Deposit Insurance Corporation (FDIC). The European Central Bank is
creating a new agency that aims to take aggressive action in needed areas. The European Union
is increasing oversight of multinational banks and supervision of financial institutions. The
United Nations has called for greater transparency in financial activities and closure of loopholes
that allow excessive speculation in global finance.
Some governments increased protectionism in an effort to safeguard jobs and wage levels.
Argentina and Brazil, for example, increased import tariffs on numerous products. Russia raised
tariffs on dozens of goods, including cars and combine harvesters. Hoping to jumpstart economic
growth, governments also increased subsidies to their own industries. The EU granted more than
$50 billion in aid to Daimler (Germany), Skoda (Czech Republic), and other struggling
carmakers in Europe. The government of the United Kingdom provided substantial subsidies to
U.K. banks and financial institutions. China has pumped hundreds of billions of dollars into its
own economy. In addition to the harmful fallout of the recession and financial crisis, rising
protectionism impacted international commerce. Ripple effects of government reforms are
extending beyond the banking and financial areas.
Skill: Synthesis
Objective: 8-5, 8-6
29
101) Explain how quotas work as an instrument of government intervention. What are voluntary
export restraints? How can firms use foreign trade zones as strategy to manage government
intervention?
Answer: Quotas restrict the physical volume or value of products that firms can import into a
country. In a classic type of quota, the U.S. government imposed an upper limit of roughly 2
million pounds on the total amount of sugar that can be imported into the United States each
year. Sugar imports that exceed this level face a tariff of several cents per pound. The upside is
that U.S. sugar producers are protected from cheaper imports, giving them a competitive edge
over foreign sugar producers. The downside is that U.S. consumers and producers of certain
types of products, such as Hershey's and Coca-Cola, pay more for sugar. It also means
companies that manufacture products containing sugar may save money by moving production to
countries that do not impose quotas or tariffs on sugar.
Governments can impose voluntary quotas, under which firms agree to limit exports of certain
products. These are also known as voluntary export restraints, or VERs. For example, import
quotas in the European Union led to an impasse in which millions of Chinese-made garments
piled up at ports and borders in Europe. The EU impounded the clothing because China had
exceeded the voluntary import quotas it had negotiated with the EU. The action created hardship
for European retailers, who had ordered their clothing stocks several months in advance.
Firms can use foreign trade zones as a strategy to manage government intervention. In an effort
to create jobs and stimulate local economic development, governments establish foreign trade
zones (also known as free trade zones or free ports). A foreign trade zone (FTZ) is an area within
a country that receives imported goods for assembly or other processing and subsequent re-
export. Products brought into an FTZ are not subject to duties, taxes, or quotas until they, or the
products made from them, enter into the non-FTZ commercial territory of the country where the
FTZ is located. Firms use FTZs to assemble foreign dutiable materials and components into
finished products, which are then re-exported. Alternatively, firms may use FTZs to manage
inventory of parts, components, or finished products that the firm will eventually need at some
other location. In the United States, for example, Japanese carmakers store vehicles at the port of
Jacksonville, Florida, without having to pay duties until the cars are shipped to U.S. dealerships.
Skill: Synthesis
Objective: 8-3, 8-6
30

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International Business The New

Realities 3rd Edition Cavusgil Test

2) Investment barriers is an example of commercial risk in the context of international business.

8) A revenue tariff aims to protect domestic industries from foreign competition.

9) Anti-dumping duty reduces or eliminates the competitive advantage of imported products

14) Dumping violates WTO rules because it amounts to unfair competition.

19) Import substitution refers to substituting exports for imports.

23) The GATT created a forum for resolving trade disputes.

27) Tariffs rarely vary with the form of an imported product.

30) Obtaining economic development incentives from host- or home-country governments

32) Which of the following situations is an example of country risk?

38) Which of the following is an example of nontariff trade barrier?

39) Which of the following is NOT a country risk in international business?

40) Which of the following is often a result of protectionist policies?

42) Governments impose defensive barriers to ________.

43) Blocking imports ________.

44) Which of the following is true with regard to protectionism?

47) Governments impose export controls for the purpose of ________.

52) Typically, administrative and bureaucratic procedures ________.

54) In Cadmia, foreign-owned automobile manufacturing companies must be managed by a

56) Tariffs that are ad valorem are ________.

58) ________ represent a major driver of market globalization.

60) An import license refers to a(n) ________.

62) Which of the following is a frequent problem in national customs agencies?

64) Governments sometimes retaliate against subsidies by imposing ________, tariffs on

65) Which of the following may allow a manufacturer to practice dumping?

68) By adopting procurement policies, governments ________.

Cotton Quota (Scenario)

87) Firms use foreign trade zones to ________.

Government intervention in international trade has several consequences. Economic freedom

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