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International Business, 8e (Griffin/Pustay)

Chapter 10 International Cooperation Among Nations

1) What is the best means of promoting economic development in Mexico?

A) trade
B) mercantilism
C) protectionism
D) export substitutions
Answer: A
Diff: 2
Skill: Concept
Objective: 1

2) Mexico relied on which of the following trade activities between 1917 and 1982?
A) low import tariffs
B) foreign direct investment restrictions
C) privatization of key industries
D) membership in GATT and the WTO
Answer: B
Diff: 2
Skill: Concept
Objective: 1

3) The average hourly manufacturing wage in Mexico is estimated to be ________.

A) $0.90
B) $1.50
C) $3.00
D) $4.50
Answer: C
Diff: 2
Skill: Concept
Objective: 2

4) Mexico does not have a trade agreement with ________.

A) Japan
B) Chile
C) Israel
D) India
Answer: D
Diff: 2
Skill: Concept
Objective: 2

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5) Which country represents the biggest threat to Mexico's trade-driven economy?

A) Taiwan
B) Vietnam
C) China
D) Brazil
Answer: C
Diff: 1
Skill: Concept
Objective: 2

6) GATT is an acronym for ________.

A) General Argument for Taxes and Tariffs
B) General Agreement on Tariffs and Trade
C) Group Accord on Trade Tendencies
D) Grace, Action, Trust, and Trade
Answer: B
Diff: 1
Skill: Concept
Objective: 1

7) What organization replaced the GATT?

A) World Bank
B) World Trade Organization
C) International Trade Commission
D) NAFTA
Answer: B
Diff: 1
Skill: Concept
Objective: 1

8) The Smoot-Hawley Act ________.

A) lowered tariffs to encourage trade
B) raised tariffs to protect domestic industries
C) designated the International Trade Organization as an independent party in trade negotiations
D) required that countries treat each other on a nondiscriminatory basis and outlawed unfair
trading practices
Answer: B
Diff: 3
Skill: Concept
Objective: 1

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9) The primary goal of the ________ was to promote a free and competitive international trading
environment.
A) Smoot-Hawley Act
B) International Trade Organization
C) World Trade Organization
D) General Agreement on Tariffs and Trade
Answer: D
Diff: 2
Skill: Concept
Objective: 1

10) The cumulative effect of GATT in developed countries was a ________.

A) substantial reduction in tariffs
B) small increase in tariffs
C) substantial increase in tariffs
D) reduction in world trade
Answer: A
Diff: 2
Skill: Concept
Objective: 1

11) Which of the following is the result of GATT?

A) dramatic growth in world trade
B) slight increase in world trade
C) creation of the EU
D) ITO formation
Answer: A
Diff: 2
Skill: Concept
Objective: 1

12) The GATT rounds focused on decreasing ________.

A) dumping
B) trade tariffs
C) preferential treatment
D) domestic industry subsidies
Answer: B
Diff: 1
Skill: Concept
Objective: 1

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13) The ________ requires that any preferential treatment granted to one country must be
extended to all countries.
A) GATT
B) WTO
C) export promotion system
D) most favored nation principle
Answer: D
Diff: 2
Skill: Concept
Objective: 1

14) What countries are granted the most-favored-nation status under the GATT?
A) less-developed nations
B) GATT member countries
C) any country that requests it
D) only members of the WTO
Answer: B
Diff: 2
Skill: Concept
Objective: 1

15) Under GATT, tariffs fell from about ________ in 1948 to about ________ in 2005.
A) 20 percent, 4 percent
B) 28 percent, 5 percent
C) 40 percent, 3 percent
D) 60 percent, 10 percent
Answer: C
Diff: 2
Skill: Concept
Objective: 1

16) The U.S., a GATT member, lowers its tariffs to Country X, a developing country, but
requires the normal tariff for all other countries. The U.S. is most likely using a ________.
A) generalized system of preferences
B) normal trade relations system
C) staggered system of taxation
D) cumulative tariff system
Answer: A
Diff: 2
Skill: Application
Objective: 1

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17) Both GATT and the WTO seek to promote ________.

A) trade in goods
B) trade in services
C) intellectual property protection
D) trade-related investment
Answer: A
Diff: 2
Skill: Concept
Objective: 1

18) Country X treats foreign firms the same way it treats domestic firms. Country X most likely
engages in ________.
A) trade balancing
B) national treatment
C) mercantilism
D) foreign treatment
Answer: B
Diff: 2
Skill: Application
Objective: 1

19) What do many labor unions believe to be missing in the WTO's objectives?
A) job security
B) technical training
C) increased service trade
D) foreign agricultural subsidies
Answer: A
Diff: 2
Skill: Concept
Objective: 1

20) A(n) ________ eliminates trade barriers among member countries.

A) free trade area
B) customs union
C) common market
D) economic union
Answer: A
Diff: 1
Skill: Concept
Objective: 2
Learning Outcome: Discuss arguments for and against regional economic integration

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21) Parson's Pet Products, an Australian firm, ships many products to Canada. In order to take
advantage of low trade barriers in the U.S., Parson's Pet Products ships its items first to the U.S.
and then reexports the goods to Canada. Parson's Pet Products is most likely using ________.
A) trade circumvention
B) origination manipulation
C) trade deflection
D) external circumvention
Answer: C
Diff: 2
Skill: Application
Objective: 2

22) A(n) ________ combines the elimination of internal trade barriers among member countries
with the adoption of common external trade policies toward nonmembers.
A) free trade area
B) customs union
C) common market
D) economic union
Answer: B
Diff: 1
Skill: Concept
Objective: 2
Learning Outcome: Discuss arguments for and against regional economic integration

23) In a(n) ________, members eliminate internal trade barriers, adopt a common external policy
toward nonmembers, and eliminate barriers to the movement of the factors of production.
A) free trade area
B) customs union
C) common market
D) economic union
Answer: C
Diff: 1
Skill: Concept
Objective: 2
Learning Outcome: Discuss arguments for and against regional economic integration

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24) The integration of the 13 separate colonies operating under separate Articles of
Confederation into a new country, the United States of America, is an example of ________.
A) free trade area
B) customs union
C) common market
D) economic union
E) political union
Answer: E
Diff: 1
Skill: Concept
Objective: 2
Learning Outcome: Discuss arguments for and against regional economic integration

25) Country X and Country Z have established a complete political and economic integration.
The countries are most likely engaged in a(n) ________.
A) customs union
B) common market
C) economic union
D) political union
Answer: D
Diff: 2
Skill: Application
Objective: 2

26) A free trade area ________.

A) is complete political and economic integration of two or more countries
B) eliminates trade barriers among member countries
C) allows workers to move freely among trade nations
D) avoids problems stemming from trade deflections
Answer: B
Diff: 2
Skill: Concept
Objective: 2

27) A customs union ________.

A) is complete political and economic integration of two or more countries
B) requires members to eliminate internal trade barriers, adopt a common external policy toward
nonmembers, eliminate barriers to the movement of the factors of production, and coordinate
economic policies
C) requires members to eliminate internal trade barriers, adopt a common external policy toward
nonmembers, and eliminate barriers to the movement of the factors of production
D) involves the elimination of internal trade barriers among member countries and the adoption
of common external trade policies toward nonmembers
Answer: D
Diff: 2
Skill: Concept
Objective: 2

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28) A common market ________.

A) is complete political and economic integration of two or more countries
B) requires members to eliminate internal trade barriers, adopt a common external policy toward
nonmembers, eliminate barriers to the movement of the factors of production, and coordinate
economic policies
C) eliminates trade barriers among member countries
D) requires members to eliminate internal trade barriers, adopt a common external policy toward
nonmembers, and eliminate barriers to the movement of the factors of production
Answer: D
Diff: 2
Skill: Concept
Objective: 2

29) An economic union ________.

A) requires members to eliminate internal trade barriers, adopt a common external policy toward
nonmembers, abolish restrictions on the movement of the factors of production, and coordinate
economic policies
B) eliminates trade barriers among member countries
C) requires members to eliminate internal trade barriers, adopt a common external policy toward
nonmembers, and eliminate barriers to the movement of the factors of production
D) involves the elimination of internal trade barriers among member countries and the adoption
of common external trade policies toward nonmembers
Answer: A
Diff: 2
Skill: Concept
Objective: 2

30) A political union ________.

A) is complete political and economic integration of two or more countries
B) eliminates trade barriers among member countries and reduces trade deflection
C) requires members to eliminate internal trade barriers, adopt a common external policy toward
nonmembers, and eliminate barriers to the movement of the factors of production
D) involves the elimination of internal trade barriers among member countries and the adoption
of common external trade policies toward nonmembers
Answer: A
Diff: 2
Skill: Concept
Objective: 2

31) ________ is an example of a free trade agreement.

A) NAFTA
B) Mercosur
C) European Union
D) APEC
Answer: A
Diff: 1
Skill: Concept
Objective: 2
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32) How many countries are part of the European Union?

A) 10
B) 12
C) 20
D) 28
Answer: D
Diff: 2
Skill: Concept
Objective: 3

33) What agreement triggered the establishment of the European Economic Community
A) GATT
B) Treaty of Rome
C) WTO
D) Uruguay Round
Answer: B
Diff: 2
Skill: Concept
Objective: 3

34) Which of the following signed the Treaty of Rome?

A) France
B) East Germany
C) the United Kingdom
D) Spain
Answer: A
Diff: 2
Skill: Concept
Objective: 3

35) The 12 member countries became known as the European Union when the ________ was
signed in 1993.
A) Treaty of Rome
B) Treaty of Geneva
C) Genoa Agreement
D) Treaty of Maastricht
Answer: D
Diff: 2
Skill: Concept
Objective: 3

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36) Which of the following is a member of the European Union?

A) Kosovo
B) Switzerland
C) Norway
D) Latvia
Answer: D
Diff: 1
Skill: Concept
Objective: 3

37) Which of the following is not an organization that governs the European Union?
A) Council of the European Union
B) European Commission
C) European Trade Council
D) European Court of Justice
Answer: C
Diff: 2
Skill: Concept
Objective: 3

38) Which EU organization is considered the most powerful?

A) Council of the European Union
B) European Commission
C) European Parliament
D) European Court of Justice
Answer: A
Diff: 2
Skill: Concept
Objective: 3

39) Which round created the WTO?

A) the Uruguay Round
B) the Doha Round
C) the Geneva Round
D) the Tokyo Round
Answer: A
Diff: 2
Skill: Concept
Objective: 1

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40) What function is served by the European Commission?

A) executive
B) administrative
C) legislative
D) judicial
Answer: B
Diff: 2
Skill: Concept
Objective: 3

41) The ________ is responsible for proposing legislation, implementing the provisions of the
Treaty of Rome, protecting EU interests in political debates, and administering the EU's
permanent bureaucracy.
A) European Parliament
B) European Court of Justice
C) European Council
D) European Commission
Answer: D
Diff: 2
Skill: Concept
Objective: 3

42) The EU uses a(n) ________ in areas such as health, consumer policy, and free movement of
workers.
A) co-decision procedure
B) unanimous vote
C) qualified majority
D) consensus
Answer: A
Diff: 2
Skill: Concept
Objective: 3

43) What function is performed by the European Court of Justice?

A) administrative
B) executive oversight
C) interpretation of law
D) managerial
Answer: C
Diff: 1
Skill: Concept
Objective: 3

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44) How did the EU initially eliminate conflicts among member countries?
A) mandatory arbitration
B) harmonization
C) negotiation
D) legislation
Answer: B
Diff: 1
Skill: Concept
Objective: 3

45) The Cassis de Dijon case brought about the concept of ________ among member nations in
the EU.
A) harmonization
B) arbitration
C) mutual recognition
D) free movement of goods
Answer: C
Diff: 2
Skill: Concept
Objective: 3

46) The ________ concept states that if one EU member state determines that a product is
appropriate for sale, then all other EU members are also obliged to do so under the provisions of
the Treaty of Rome.
A) harmonization
B) arbitration
C) mutual recognition
D) free movement of goods
Answer: C
Diff: 2
Skill: Concept
Objective: 3

47) Which organization is responsible for controlling the Eurozone's money supply, interest
rates, and inflation?
A) European Central Bank
B) European Commission
C) European Parliament
D) European Court of Justice
Answer: A
Diff: 2
Skill: Concept
Objective: 3

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48) Eurozone participants have agreed to limit their annual government deficits to no more than
________ of their GDPs.
A) 3 percent
B) 5 percent
C) 7 percent
D) 9 percent
Answer: A
Diff: 1
Skill: Concept
Objective: 3

49) The Treaty for Europe is also known as the ________.

A) Treaty of Rome
B) Maastricht Treaty
C) Treaty of Amsterdam
D) Paris Treaty
Answer: C
Diff: 1
Skill: Concept
Objective: 3

50) Which of the following was a component of the Treaty of Amsterdam?

A) a strong commitment to address high unemployment in the EU
B) a plan to limit the role of the European Parliament
C) termination of a two-track system
D) enforcement of GATT policies
Answer: A
Diff: 2
Skill: Concept
Objective: 3

51) Which of the following was an element of the Treaty of Lisbon ________.
A) permitting the European Commission to increase in size
B) limiting the powers of the European Parliament
C) establishing a full-time President of the European Council
D) prohibiting national legislatures to voice formal concerns about EU laws
Answer: D
Diff: 2
Skill: Concept
Objective: 3
Learning Outcome: Discuss arguments for and against regional economic integration

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52) Which country listed below remains a non-member of the European Free Trade Association?
A) Denmark
B) Liechtenstein
C) Norway
D) Switzerland
Answer: A
Diff: 1
Skill: Concept
Objective: 4

53) The European Free Trade Association has joined with the ________ to form the European
Economic Area.
A) Mercosur
B) European Union
C) Commonwealth of Independent States
D) Benelux nations
Answer: B
Diff: 2
Skill: Concept
Objective: 4

54) Which of the following is part of NAFTA?

A) Cuba
B) Canada
C) Peru
D) Greenland
Answer: B
Diff: 1
Skill: Concept
Objective: 4

55) What percentage of an automobile must be produced in the United States, Canada, and/or
Mexico in order for it to be considered a North American product?
A) 37 percent
B) 50 percent
C) 62.5 percent
D) 75.5 percent
Answer: C
Diff: 3
Skill: Concept
Objective: 4

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56) A ________ is a factory in which little transformation of a product is undertaken.

A) maquiladora
B) screwdriver plant
C) greenfield operation
D) global shipping platform
Answer: B
Diff: 2
Skill: Concept
Objective: 4

57) Which regional trade association includes the Bahamas, Grenada, and Jamaica?
A) ASEAN
B) CARICOM
C) ANCOM
D) ECOWAS
Answer: B
Diff: 2
Skill: Concept
Objective: 4

58) Which country initiated the Caribbean Basin Initiative?

A) Venezuela
B) the United States
C) the Caribbean islands
D) Bermuda
Answer: B
Diff: 3
Skill: Concept
Objective: 4

59) Which of the following countries is part of the Mercosur Accord?

A) Argentina
B) Guatemala
C) Columbia
D) Mexico
Answer: A
Diff: 2
Skill: Concept
Objective: 4

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60) The ________ promotes free trade among Bolivia, Chile, Colombia, Ecuador, and Peru.
A) Mercosur Accord
B) Andean Community
C) Central America Common Market
D) Southern Cone Customs Union
Answer: B
Diff: 2
Skill: Concept
Objective: 4

61) The ________ is an agreement to create a customs union among the governments of
Argentina, Brazil, Paraguay, and Uruguay.
A) Mercosur Accord
B) ASEAN Free Trade Area
C) Andean Pact
D) Central America Common Market
Answer: A
Diff: 2
Skill: Concept
Objective: 4

62) Ernest, a federal government employee, attended a session of the final GATT Round. Ernest
attended the ________ Round.
A) Kennedy
B) Uruguay
C) Geneva
D) Tokyo
Answer: B
Diff: 2
Skill: Application
Objective: 1

63) Which GATT Round led to the creation of the WTO?

A) Doha
B) Geneva
C) Uruguay
D) Kennedy
Answer: C
Diff: 2
Skill: Concept
Objective: 1

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64) As a participant at the Doha Round, you would experience the most negotiation difficulties
in the area of ________.
A) agricultural goods
B) tariff reductions
C) foreign exchange
D) service trade
Answer: A
Diff: 2
Skill: Application
Objective: 1

65) Salvo Software develops computer games and business software systems that are popular
throughout the world. Like many software firms, Salvo has experienced problems with illegal
counterfeiting of its products. Given this concern, which of the following would be of most
interest to Salvo?
A) TRIMS
B) BARS
C) TRIPS
D) GATS
Answer: C
Diff: 2
Skill: Application
Objective: 1

66) Country X wants to encourage trade by eliminating trade barriers with the three countries
along its borders. However, Country X wants each of the countries to be able to establish their
own trade policies even though this may lead to problems with trade deflection. Which form of
economic integration is Country X most likely considering?
A) economic union
B) common market
C) customs union
D) free trade area
Answer: D
Diff: 2
Skill: Application
Objective: 2
Learning Outcome: Discuss arguments for and against regional economic integration

67) A ________ is the third step along the path to total economic integration.
A) commercial market
B) economic union
C) customs union
D) free trade area
Answer: A
Diff: 2
Skill: Application
Objective: 2

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68) CVR Enterprises is based in the EU country that has the greatest number of votes in
Parliament. CVR Enterprises is most likely a ________ firm.
A) German
B) French
C) British
D) Italian
Answer: A
Diff: 2
Skill: Application
Objective: 3

69) Natalie is employed by the governing organization of the EU that is responsible for
proposing legislation, administering the EU's permanent bureaucracy, and implementing the
provisions of the Treaty of Rome. Natalie most likely works for the ________.
A) European Court of Justice
B) European Commission
C) European Parliament
D) Council of the European Union
Answer: B
Diff: 2
Skill: Application
Objective: 3

70) Executives at TVR Enterprises, an MNE based in Germany, feel threatened by a pending EU
regulation that will require the MNE to reduce its production capacity. Which of the following
actions is the most appropriate for TVR?
A) complying with the EU's mutual recognition laws
B) apply for a harmonization regulation with the EU
C) appealing to the European Court of Justice
D) lobbying the European Commission
Answer: D
Diff: 3
Skill: Application
Objective: 3

71) Now that it has gained entry to the World Trade Organization, China represents a threat to
Mexico as a low-cost manufacturing location.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 1

72) The GATT is an agreement, not an organization.

Answer: TRUE
Diff: 2
Skill: Concept
Objective: 2

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73) The GATT seeks to reduce barriers to international trade.

Answer: TRUE
Diff: 1
Skill: Concept
Objective: 2

74) Prior to GATT, high tariffs were the most serious impediment to world trade.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 2

75) One weakness of the WTO is that the enforcement of the GATT was stronger.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 2

76) The Multifibre Agreement is a relatively new part of the WTO's focus on reducing barriers in
agricultural trade.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 2

77) In the last decade, there has been a decrease in the number of trading blocs.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 2

78) A free trade area requires members to eliminate internal trade barriers and establish a
common external trade policy.
Answer: FALSE
Diff: 1
Skill: Concept
Objective: 2

79) Economic integration is typically beneficial to all sectors within an economy.

Answer: FALSE
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Discuss arguments for and against regional economic integration

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80) Each form of economic integration benefits a nation as a whole, but can hurt certain sectors
or communities within the economy.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 2
Learning Outcome: Discuss arguments for and against regional economic integration

81) EU members are no longer sovereign nations.

Answer: FALSE
Diff: 2
Skill: Concept
Objective: 3

82) In decisions made by the Council of the European Union, every country has an equal vote.
Answer: FALSE
Diff: 3
Skill: Concept
Objective: 3

83) GATT negotiations have led to dramatic growth in world trade since the end of World War
II.
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 1

84) The individuals appointed to the European Commission serve the European Union, not their
individual country.
Answer: TRUE
Diff: 3
Skill: Concept
Objective: 3

85) The European Commission serves as the legislative branch of the EU.
Answer: FALSE
Diff: 3
Skill: Concept
Objective: 3

86) English is the EU's official language.

Answer: FALSE
Diff: 1
Skill: Concept
Objective: 3

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87) The European Court of Justice declared Germany's 450-year-old beer purity law illegal.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 3

88) The Maastricht Treaty is also known as the Treaty on European Union.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 3

89) One important component of the Maastricht Treaty was the establishment of economic and
monetary union among European Union members.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 3

90) The Treaty for Europe established a two-track system that allows groups of members to
proceed with their economic and political union faster than the EU as a whole.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 3

91) The EU's "one size fits all" monetary policy has been hailed as a success because it treats all
countries equally.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 3

92) The EU's Common Agricultural Policy is a source of controversy because it favors Britain's
farmers over French interests.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 3

93) As of 2013, 17 countries use the Euro.

Answer: TRUE
Diff: 2
Skill: Concept
Objective: 3

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94) Mexico is the United States' largest trading partner.

Answer: FALSE
Diff: 1
Skill: Concept
Objective: 4

95) A screwdriver plant is a factory in which little transformation of a product is undertaken.

Answer: TRUE
Diff: 2
Skill: Concept
Objective: 2

96) For most of their histories, Australia and New Zealand have been trade rivals.
Answer: TRUE
Diff: 2
Skill: Concept
Objective: 2

97) On the whole, regional trading blocs have proved to have a major impact on regional trade in
Africa.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 4

98) Australia and New Zealand refuse to create a regional trading bloc because of their
competition with each other.
Answer: FALSE
Diff: 2
Skill: Concept
Objective: 4

99) The Asia-Pacific Economic Cooperation Initiative was developed in response to the growing
interdependence of the Asia-Pacific economies.
Answer: TRUE
Diff: 1
Skill: Concept
Objective: 4

100) Iceland, Norway, and Switzerland do not belong to any regional trading blocs.
Answer: FALSE
Diff: 1
Skill: Concept
Objective: 4

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101) What is the most-favored-nation principle? What are the two exceptions to the most-
favored-nation principle? Why was MFN status changed to normal trade relations (NTR) status?
Answer: The most-favored-nation principle requires that any preferential treatment granted to
one country must be extended to all countries. The two exceptions are that members can lower
tariffs to developing countries without lowering them for more developed countries, and that
regional arrangements that promote economic integration are allowed. The Clinton
administration decided to adopt the term "normal trade relations" (NTR) to replace MFN. It had
two reasons for doing so. The public reason was that NTR was a more accurate description; if
almost all countries receive such treatment, then the practice is "normal" rather than "most
favored." There was also a political reason. The administration was in a battle to secure
permanent MFN status for China as part of the administration's agreement to allow China to join
the WTO. President Clinton judged that it would be easier to sway public opinion and win the
vote in Congress if the United States were perceived to be treating China normally, rather than
providing it favorable treatment.
Diff: 3
Skill: Critical Thinking
Objective: 1
Learning Outcome: Discuss arguments for and against regional economic integration

102) What is the most important characteristic of regional trading blocs?

Answer: The most important characteristic is the extent of economic integration among the
bloc's members.
Diff: 3
Skill: Application
Objective: 2
Learning Outcome: Discuss arguments for and against regional economic integration

103) What is a free trade area? Provide an example of a free trade area.
Answer: A free trade area encourages trade among members by eliminating trade barriers.
NAFTA is an example of a free trade area.
Diff: 3
Skill: Synthesis
Objective: 2, 4
Learning Outcome: Discuss arguments for and against regional economic integration

104) What is a customs union? Provide an example of a customs union.

Answer: A customs union has all the characteristics of a free trade area but also includes the
adoption of common external trade policies toward nonmembers. A more contemporary example
of a customs union is the Mercosur Accord, an agreement initially signed by Argentina, Brazil,
Paraguay, and Uruguay to promote trade among themselves. In 2010, Russia, Belarus, and
Kazakhstan similarly agreed to create a customs union.
Diff: 3
Skill: Synthesis
Objective: 2, 4
Learning Outcome: Discuss arguments for and against regional economic integration

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105) What is a common market? What is the primary benefit of the common market to European
firms and European workers?
Answer: A common market has all the characteristics of a customs union but also includes the
removal of barriers that inhibit the movement of factors of production. The common market
offers the opportunity to sell goods in a large, rich market free from barriers to trade. Workers
may move from their homeland and practice their profession or trade in any of the other member
nations. Firms may locate production facilities, invest in other businesses, and utilize their
technologies anywhere within the common market. Productivity within the common market is
expected to rise because factors of production are free to locate where the returns to them are
highest.
Diff: 3
AACSB: Reflective Thinking
Skill: Synthesis
Objective: 2, 3
Learning Outcome: Discuss arguments for and against regional economic integration

106) What is the difference between an economic union and a political union? Which one
characterizes the EU? Why?
Answer: An economic union has all the characteristics of a common market but also includes
the complete coordination of their economic policies in order to blend their economies into a
single entity. A political union is the complete political as well as economic integration of two or
more countries. The members of the European Union who have adopted the euro as their
domestic currency are in the process of creating an economic union among themselves.
Diff: 3
Skill: Synthesis
Objective: 2, 3
Learning Outcome: Discuss arguments for and against regional economic integration

107) What are the four organizations that govern the EU?
Answer: The four organizations include the Council of the European Union, the European
Commission, the European Parliament, and the European Court of Justice.
Diff: 2
Skill: Concept
Objective: 3

108) What functions are performed by the European Commission?

Answer: It proposes legislation to be considered by the Council. It implements the provisions of
the Treaty of Rome and other EU treaties; it protects the EU's interests in political debates; it has
extensive powers in implementing the EU's customs union, the Common Agricultural Policy,
and the completion of the internal market; and it administers the EU's permanent bureaucracy.
Diff: 3
Skill: Application
Objective: 3

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109) What is the purpose of the European Parliament? Why is the role of the European
Parliament likely to expand?
Answer: The European Parliament currently comprises 748 representatives elected in national
elections to serve five-year terms. Seats are allocated in rough proportion to a country's
population, although the smaller states (Malta, Cyprus, Luxembourg) are overrepresented on that
basis. Of the EU's governing bodies, the Parliament was originally the weakest. Initially it had
only a consultative role in EU policy making. However, it has used its budgetary powers to
enlarge its influence within the EU's governing institutions, and it also gained additional powers
under the Maastricht, Amsterdam, Nice, and Lisbon Treaties. The role of the European
Parliament is likely to expand because many Europeans are concerned about the lack of
accountability in the EU's programs and the lack of democracy in its decision-making processes.
Diff: 3
Skill: Critical Thinking
Objective: 3
Learning Outcome: Discuss arguments for and against regional economic integration

110) What are the three pillars upon which the Maastricht Treaty rests?
Answer: A new agreement to create common foreign and defense policies among members;
cooperation on police, judicial, and public safety matters; and the creation of an economic and
monetary union among member states are the three pillars of the treaty.
Diff: 3
Skill: Concept
Objective: 3

111) What is the purpose of the cohesion fund in the European Union? Do you think the
cohesion fund is appropriate and effective? Why or why not?
Answer: The cohesion fund provides a means of funneling economic development aid to
countries with a per capita GDP that is less than 90 percent of the EU average. The initial
recipients of cohesion funds included Spain, Portugal, Greece, and Ireland, although Ireland's
access to this aid terminated in 2004 because its then booming economy elevated Ireland's per
capita income above the average for the EU; the 12 newest members of the EU also qualify for
aid from the cohesion fund.
Diff: 3
AACSB: Reflective Thinking
Skill: Critical Thinking
Objective: 3
Learning Outcome: Discuss arguments for and against regional economic integration

112) What was the most important aspect of the Maastricht Treaty?
Answer: The most important aspect of the Maastricht Treaty was the establishment of economic
and monetary union among European Union countries.
Diff: 2
Skill: Concept
Objective: 3

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113) Why do you think it takes years to transform an EU Commission proposal into an EU law
and then implement that law into national legislation?
Answer: Transforming an EU Commission proposal into an EU law and then implementing the
law into national legislation can take years because the EU likes to have a strong consensus on
issues among its members before it adopts new legislation.
Diff: 3
AACSB: Reflective Thinking
Skill: Critical Thinking
Objective: 3
Learning Outcome: Discuss arguments for and against regional economic integration

114) What was the European Commission's White Paper?

Answer: The White Paper called for accelerated progress on ending all trade barriers and
restrictions on the free movement of goods, services, capital, and labor among members.
Diff: 2
Skill: Application
Objective: 3

115) What is the purpose of the Stability and Growth Pact? Why has the pact been criticized?
Answer: Under the terms of the Stability and Growth Pact, eurozone participants have agreed to
limit their annual government deficits to no more than 3 percent of their GDPs and so have
limited their ability to use fiscal policy to promote economic growth. National governments have
become vulnerable to losing elections because of short-term pocketbook issues. Other critics fear
that a "one size fits all" monetary policy for the entire eurozone will generate economic problems
whenever the national economies of the eurozone countries are at different stages of the business
cycle. In the mid-2000s, for example, the Irish economy was overheating, while the Italian,
French, and German economies were stagnating. Irish government officials would have preferred
that the European Central Bank aggressively raise interest rates in the hope of cooling down
Ireland's economy, while officials from the other countries argued for more expansionary
monetary policies. The ensuing Irish housing bubble–and bursting of the housing bubble—
contributed to the EU's bailout crisis of 2010-11.
Diff: 3
AACSB: Analytical Thinking
Skill: Critical Thinking
Objective: 3
Learning Outcome: Discuss arguments for and against regional economic integration

116) Why do France and the United Kingdom disagree over the EU's Common Agricultural
Policy?
Answer: France and the United Kingdom squabble over the EU's Common Agricultural Policy
because it disproportionately benefits French farmers to the detriment of British interests.
Diff: 3
Skill: Concept
Objective: 3
Learning Outcome: Discuss arguments for and against regional economic integration

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117) What is a screwdriver plant? What NAFTA guidelines are in place to overcome the
problem of screwdriver plants and protect industries?
Answer: A screwdriver plant is one in which very little transformation of a product takes place.
NAFTA negotiators developed detailed rules of origin that defined whether a good was North
American in origin and thus qualified for preferential tariff status. In the automobile industry, for
example, U.S. and Canadian labor unions worried that European and Asian automakers would
exploit the treaty by producing major components elsewhere and then establishing a North
American factory merely to assemble motor vehicles, thereby causing the loss of jobs at
Canadian and U.S. parts-producing factories. To diminish this problem, NAFTA specifies that
for an automobile to qualify as a North American product, 62.5 percent of its value must be
produced in Canada, Mexico, or the United States. Similarly, to protect textile industry jobs,
clothing and other textile products must use North American-produced fibers to benefit from
NAFTA's preferential tariff treatment.
Diff: 3
Skill: Application
Objective: 4
Learning Outcome: Discuss arguments for and against regional economic integration

118) What two factors led to the creation of the ASEAN trading bloc?
Answer: A decrease in government control of national economies that stimulated local
entrepreneurs and attracted FDI and a defensive response to the growth of other regional trading
blocs led to the creation of ASEAN.
Diff: 3
Skill: Concept
Objective: 4
Learning Outcome: Discuss arguments for and against regional economic integration

119) What are the three primary goals of the World Trade Organization? Do you believe the
WTO has been successful? Why or why not?
Answer: The goals of the WTO are to 1) promote trade flows by encouraging nations to adopt
nondiscriminatory trade policies, 2) reduce remaining trade barriers through multilateral
negotiations, and 3) establish impartial procedures for resolving trade disputes among members.
Diff: 3
AACSB: Reflective Thinking
Skill: Critical Thinking
Objective: 1

120) How does the WTO differ from the GATT?

Answer: While the GATT agreement was incorporated into the WTO agreement, there are two
important differences. The GATT focuses on promoting trade in goods, whereas the WTO's
mandate is broader. The WTO is responsible for trade in goods, trade in services, international
intellectual property protection, and trade-related investment. Also, the WTO's enforcement
powers are much stronger than those of the GATT.
Diff: 3
Skill: Application
Objective: 1

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121) Country X has violated its WTO obligations. How would the WTO handle the problem?
Answer: A country failing to live up to the agreement may have a complaint filed against it. If a
WTO panel finds the country in violation of the rules, the panel will likely ask the country to
eliminate the trade barrier. If the country refuses, the WTO will allow the complaining country to
impose trade barriers on the offending country equal to the damage caused by the trade barrier.
The offending country is not allowed to counterretaliate by imposing new trade barriers against
the complainant.
Diff: 3
Skill: Application
Objective: 1

122) Explain the five forms of economic integration and provide an example of each.
Answer: The five forms of integration are free trade area, customs union, common market,
economic union, and political union. The free trade area, such as NAFTA, represents the lowest
form of economic integration while the political union represents the highest level of economic
integration. A free trade area encourages trade among members by eliminating trade barriers. A
customs union, such as the Mercosur Accord, combines the elimination of internal trade barriers
among its members with the adoption of common external trade policies toward nonmembers. In
a common market, such as the European Economic Area, members eliminate internal trade
barriers among themselves and adopt a common external trade policy toward nonmembers, plus
it eliminates barriers that inhibit the movement of factors of production among its members. An
economic union, such as the EU, represents full integration of the economies of two or more
countries. In addition to all the requirements of a customs union, an economic union also
requires its members to coordinate their economic policies to blend their economies into a single
entity. A political union is the complete political as well as economic integration of two or more
countries, thereby effectively making them one country. An example of a political union is the
integration of the 13 separate colonies operating under the Articles of Confederation into a new
country, the United States of America.
Diff: 3
Skill: Synthesis
Objective: 2, 4
Learning Outcome: Discuss arguments for and against regional economic integration

123) What is the greatest challenge of the European Union?

Answer: The greatest challenge of the European Union is whether and how power relationships
among member countries and the various governing bodies of the European Union should be
changed as a result of its expansion. The existing governance structure that was developed for
the original six members is unlikely to work with a growing membership.
Diff: 3
Skill: Critical Thinking
Objective: 3
Learning Outcome: Discuss arguments for and against regional economic integration

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124) What type of economic integration is exemplified by NAFTA? How has NAFTA benefited
the countries involved?
Answer: A free trade area, such as NAFTA, encourages trade among its members by eliminating
trade barriers (tariffs, quotas, and other nontariff barriers [NTBs]) among them. NAFTA reduces
tariffs and NTBs to trade among Canada, Mexico, and the United States. Most experts believe
that NAFTA has benefited all three countries, although the gains have been more modest in
Canada and the United States than most NAFTA advocates expected. NAFTA's overall impact
on the Mexican economy has been dramatic.
Diff: 3
Skill: Synthesis
Objective: 2, 4
Learning Outcome: Discuss arguments for and against regional economic integration

125) How can international businesspeople protect themselves from adverse EU regulations?
Answer: Firms that are threatened by impending EU regulations can lobby the EU Commission
and try to persuade it to adopt more preferable regulations. There are some 15,000 lobbyists in
Brussels. Firms can also lobby an ally on the Council like Japan did when it enlisted the help of
the British Council representative.
Diff: 3
Skill: Application
Objective: 3
Learning Outcome: Discuss arguments for and against regional economic integration

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