International Business Quiz

Chapter 08 - Regional Economic Integration

Chapter 08Regional Economic Integration

True / False Questions

1. (p. 276) Agreements among countries in a geographic region to reduce and ultimately remove, tariff and nontariff barriers to the free flow of goods, services and factors of production between each other is known as regional economic integration. TRUE

Difficulty: Easy

2. (p. 276) Countries can reduce trade barriers more rapidly by entering into regional agreements than they could by going through the WTO. TRUE

Difficulty: Medium

3. (p. 276) The move toward regional economic integration been most successful in Europe. TRUE

Difficulty: Easy

4. (p. 278) In a customs union, trade barriers are eliminated among member countries and each country maintains its own external trade polices with nonmember countries. FALSE

Difficulty: Medium

5. (p. 278) The European Union is an example of a perfect economic union. FALSE

Difficulty: Medium

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6. (p. 278) A common market, has no barriers to trade between member countries, includes a common external trade policy and allows factors of production to move freely between members. TRUE

Difficulty: Medium

7. (p. 279) Economic theories suggest that free trade and investment is a zero-sum game. FALSE

Difficulty: Medium

8. (p. 279) Regional economic integration can be seen as an attempt to achieve additional gains from the free flow of trade and investment between countries. TRUE

Difficulty: Medium

9. (p. 279) It is easier to establish free trade among a limited number of adjacent countries than it is among the world community. TRUE

Difficulty: Medium

10. (p. 279) Linking neighboring countries economically and making them interdependent, creates incentives to increase political cooperation as well. TRUE

Difficulty: Medium

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11. (p. 280) Because of the fact that everyone benefits from economic integration, it is easy to achieve and sustain. FALSE

Difficulty: Medium

12. (p. 280) A major impediment to economic integration is the loss of sovereignty it entails. TRUE

Difficulty: Medium

13. (p. 280) Trade creation occurs when high cost domestic producers are replaced by low cost producers within a free trade area. TRUE

Difficulty: Easy

14. (p. 280) When lower cost external suppliers are replaced by higher cost suppliers within a free trade area, there is trade creation. FALSE

Difficulty: Easy

15. (p. 280) A regional free trade agreement will benefit the world only when the amount of trade it diverts exceeds the amount of trade it creates. FALSE

Difficulty: Medium

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16. (p. 281) There are two main trading blocs in Europe, the European Union and the European Free Trade Association. TRUE

Difficulty: Easy

17. (p. 281) The Treaty of Rome, signed in 1957, established the European Free Trade Association. FALSE

Difficulty: Medium

18. (p. 281) A central reason for the establishment of the EU was a strong desire on the part of member countries to hold their own on the world's political and economic stage. TRUE

Difficulty: Medium

19. (p. 282) The Council of the European Union is responsible for proposing EU legislation, implementing it and monitoring compliance with EU laws by member states. FALSE

Difficulty: Medium

20. (p. 283) The ultimate controlling unit within the EU is the Council of the European Union. TRUE

Difficulty: Medium

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21. (p. 283) The European Parliament is an elected body that debates legislation proposed by the European Commission. TRUE

Difficulty: Medium

22. (p. 284) The Single European Act committed member countries to work toward the establishment of a single market. TRUE

Difficulty: Medium

23. (p. 287) The establishment of the euro required participating countries to give up their monetary policy. TRUE

Difficulty: Medium

24. (p. 287) The Single European Act committed EU countries to adopting a common currency by January 1, 1999. FALSE

Difficulty: Medium

25. (p. 287) Establishment of the euro created the largest currency zone in the world, replacing the position the U.S. dollar had held for decades. FALSE

Difficulty: Medium

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26. (p. 287) Great Britain, Germany and France have led the push toward a eurozone in the EU. FALSE

Difficulty: Medium

27. (p. 287) A key benefit resulting from the adoption of the euro is the ability to compare prices across member markets. TRUE

Difficulty: Medium

28. (p. 288) While countries lost some sovereignty through the establishment of the euro, each country maintains its own central bank to manage its monetary policy. FALSE

Difficulty: Hard

29. (p. 289) Since its establishment, the euro has had a stable trading history. FALSE

Difficulty: Medium

30. (p. 293) The creation of NAFTA resulted in more job loss for the U.S. between 1994 and 2000, compared to the jobs created during the same period. FALSE

Difficulty: Medium

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31. (p. 293) Chile has indicated a strong interest in joining NAFTA. TRUE

Difficulty: Medium

32. (p. 293) The Andean Pact is a highly successful common market modeled after the EU. FALSE

Difficulty: Medium

33. (p. 295) The free trade area of the Americas that was established in 2005 has thus far proven to be a success. FALSE

Difficulty: Hard

34. (p. 296) A free trade area of the Americas, if established, would create a market of more than 850 million people. TRUE

Difficulty: Hard

35. (p. 297) The Asia-Pacific Economic Cooperation was established to increase multinational cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region. TRUE

Difficulty: Medium

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36. (p. 299) To exploit the opportunities presented by the EU, non-EU firms must establish EU subsidiaries. TRUE

Difficulty: Medium

37. (p. 299) A benefit to companies of economic integration is the opportunity to centralize their production and reduce costs. TRUE

Difficulty: Medium

38. (p. 300) Once barriers to trade and investment are removed, companies can treat a group of integrated countries as a single market and produce standardized products for it. FALSE

Difficulty: Medium

39. (p. 300) Lowering barriers to trade and investment between countries is likely to lead to increased price competition throughout the EU and NAFTA. TRUE

Difficulty: Medium

40. (p. 301) One criticism of the EU has centered on the notion that the creation of the EU could result in the creation of a Fortress Europe. TRUE

Difficulty: Medium

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Multiple Choice Questions

41. (p. 276) An agreement between countries in a geographic region to reduce tariff and nontariff barriers to the free flow of goods, services and factors of production between each other is referred to as A. Regional economic integrationB. Socio-economic integrationC. Political integrationD. Economic-political integration

Difficulty: Easy

42. (p. 276) The movement toward regional economic integration has been most successful in A. Latin AmericaB. North AmericaC. EuropeD. Asia

Difficulty: Medium

43. (p. 276) Identify the incorrect statement pertaining to the European Union. A. In 1993, it formally removed many barriers to doing business across borders within the EUB. Its member states have launched a single currency, the euroC. It was joined by two countries Switzerland and Norway, in 2007D. It has expanded from 15 to 25 countries in 2004

Difficulty: Medium

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44. (p. 276) On January 1, 1993, the _____ moved toward a single market with 340 million consumers. A. European UnionB. MERCOSURC. Andean communityD. NAFTA

Difficulty: Medium

45. (p. 276) In 1991, Argentina, Brazil, Paraguay and Uruguay implemented an agreement known as A. NAFTAB. MERCOSURC. APECD. FTAA

Difficulty: Easy

46. (p. 277) These are the most popular form of regional economic integration, accounting for almost 90 percent of regional agreements. A. Free trade areasB. Customs unionsC. Common marketsD. Economic unions

Difficulty: Medium

47. (p. 277) Which of the following selections accurately depicts the levels of economic integration from least integrated to most integrated? A. Common market, economic union, full political union, free trade area and customs unionB. Common market, economic union, full political union, free trade area and customs unionC. Free trade area, customs union, common market, economic union and full political unionD. Full political union, free trade area, common market, customs union and economic union

Difficulty: Hard

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48. (p. 277) In a free trade area A. Barriers to the trade of goods and services among member nations are removedB. A common currency is adoptedC. A single Parliament determines political and foreign policyD. A common external trade policy is adopted

Difficulty: Medium

49. (p. 277) In a _____, no discriminatory tariffs, quotas, subsidies or administrative impediments are allowed to distort trade between member nations. Each country, however is allowed to determine its own trade policies with regard to nonmembers. A. Common marketB. Economic unionC. Political unionD. Free trade area

Difficulty: Medium

50. (p. 277) The most enduring free trade area in the world is the A. Asia Pacific Economic CooperationB. MERCOSURC. European Free Trade AssociationD. North American Free Trade Association

Difficulty: Easy

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51. (p. 278) Which of the following is true of a common market? A. All barriers to the trade of goods and services among member countries are removed and each country maintains its own policy towards nonmember countriesB. Involves the free flow of products and factors of production between member countries and the adoption of individual external trade policiesC. Has no barriers to trade between member countries, includes a common external trade policy and allows factors of production to move freely between membersD. Eliminates trade barriers between member countries and adopts a common external trade policy and a common currency

Difficulty: Medium

52. (p. 278) Which of the following statement best defines a custom union? A. All barriers to the trade of goods and services among member countries are removed and each country maintains its own policy towards nonmember countriesB. Eliminates trade barriers between member countries and adopts a common external trade policy and a common currencyC. Has no barriers to trade between member countries, includes a common external trade policy and allows factors of production to move freely between membersD. Eliminates trade barriers between member countries and adopts a common external trade policy

Difficulty: Hard

53. (p. 278) The Andean Pact is an example of a(n) A. Economic unionB. Customs unionC. Common marketD. Political union

Difficulty: Hard

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54. (p. 278) Identify the incorrect statement about a common market. A. It has no barriers to trade between member countriesB. It includes a common external trade policyC. It establishes a central political apparatus coordinating the economic, social and foreign policy of the member statesD. It allows factors of production to move freely between members

Difficulty: Medium

55. (p. 278) Which of the following is approaching at least partial political union status? A. EFTAB. MERCOSURC. ASEAND. EU

Difficulty: Medium

56. (p. 278) A(n) _____ involves the free flow of products and factors of production between member countries and the adoption of a common external trade policy, along with a common currency, harmonization of members' tax rates and a common monetary and fiscal policy. A. Free trade areaB. Economic unionC. Common marketD. Customs union

Difficulty: Medium

57. (p. 279) Economic theories suggest that free trade and investment A. Is a zero-sum gameB. Has a drag effect on economic growthC. Is a positive sum gameD. Is not achievable for developed countries

Difficulty: Easy

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58. (p. 279) A political benefit of economic integration is that A. It enables participants to achieve gains from the free flow of tradeB. It enables participants to achieve gains from the free flow of investmentC. It allow countries to specialize in the production of goods and services that they can produce most efficientlyD. Linking neighboring economies creates incentives for cooperation between the neighboring states and reduces the potential for violent conflict

Difficulty: Medium

59. (p. 279-280) All of the following are reasons why economic integration has never been easy to achieve or sustain, except A. Even though it aids the majority, it has its costsB. A nation as a whole may benefit significantly, but certain groups may loseC. There are concerns over loss of national sovereigntyD. Linking neighboring economies makes them increasingly dependent on each other

Difficulty: Medium

60. (p. 280) _____ occurs when high cost domestic producers are replaced by low cost producers within the free trade area. A. A free trade zoneB. Trade diversionC. Trade creationD. Trade interpretation

Difficulty: Easy

61. (p. 280) Trade diversion occurs when A. Low-cost producers within the free trade area replace high-cost domestic producersB. Lower cost suppliers replace higher cost external suppliers within the free trade areaC. Higher cost external suppliers replace lower cost domestic producers within the free trade areaD. Higher cost suppliers replace lower cost external suppliers within the free trade area

Difficulty: Hard

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62. (p. 281) Which of the following trading bloc is emerging as an economic and political superpower of the same order as the U.S. and Japan? A. MERCOSURB. APECC. NAFTAD. EU

Difficulty: Easy

63. (p. 281) The European Community was established by A. The Treaty of Rome signed in 1957B. The Maastricht Treaty signed in 1991C. The Maastricht Treaty of 1994D. The Single European Act of 1987

Difficulty: Medium

64. (p. 281) The European Coal and Steel Community, formed in 1951, was a forerunner of A. EFTAB. EUC. MERCOSURD. APEC

Difficulty: Easy

65. (p. 282) Which of the following is not a main institution in the political structure of the EU? A. The European ParliamentB. The European Central BankC. The European CommissionD. The Council of the European Union

Difficulty: Medium

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66. (p. 282) The _____ is responsible for proposing EU legislation, implementing it and monitoring compliance with EU laws by member states. A. European ParliamentB. European CommissionC. Council of the European UnionD. Court of Justice

Difficulty: Medium

67. (p. 283) The _____ represents the interests of member states and is clearly the ultimate controlling authority within the EU. A. European ParliamentB. European CommissionC. Council of the European UnionD. Court of Justice

Difficulty: Medium

68. (p. 283) Which of the following is directly elected by the populations of the member states and is primarily a consultative rather than legislative body? A. European ParliamentB. European CommissionC. Council of the European UnionD. Court of Justice

Difficulty: Medium

69. (p. 284) Identify the incorrect statement pertaining to the EU's Court of Justice. A. It is comprised of one judge from each countryB. It is the supreme appeals court for EU lawC. Its judges are required to act as representatives of national interestsD. A member country can bring other members to the court for failing to meet EU treaty obligations

Difficulty: Medium

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70. (p. 284) The _____, adopted by the member nations of the European Community in 1987, committed member countries to work toward the establishment of a single market by December 21, 1992. A. Maastricht TreatyB. Treaty of RomeC. Single European ActD. Delores Commission

Difficulty: Medium

71. (p. 287) All of the following are true of the euro, except A. Its notes and coins were first issued on January 1, 1999B. It required participating countries to give up their own currenciesC. Countries lost control of monetary policy when it was establishedD. It created the second largest currency zone in the world

Difficulty: Hard

72. (p. 287) In December 1991, EC members signed this treaty that committed them to adopting a common currency by January 1, 1999. A. Treaty of RomeB. Delores CommissionC. Maastricht TreatyD. Single European Act

Difficulty: Medium

73. (p. 288) Which of the following is seen as a disadvantage of the euro? A. Higher foreign exchange and hedging costsB. National authorities losing control over monetary policyC. It becomes difficult to compare prices across EuropeD. Undermines the development of a pan-European capital market

Difficulty: Medium

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74. (p. 290) _____ has a customs union with the EU, but has been rejected for a full membership because of concern over human rights violations. A. MaltaB. CyprusC. TurkeyD. Bulgaria

Difficulty: Hard

75. (p. 293) On average, studies indicate that NAFTA's overall impact has been A. Large and positiveB. Small but positiveC. Large but negativeD. Small and negative

Difficulty: Medium

76. (p. 293-294) Bolivia, Peru, Ecuador, Columbia and Venezuela are all members of A. EUB. NAFTAC. APECD. Andean Community

Difficulty: Easy

77. (p. 294) MERCOSUR originated as a(n) _____ between Brazil and Argentina in1988. A. Open marketB. Free trade pactC. Customs unionD. Free trade zone

Difficulty: Medium

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78. (p. 294) According to Alexander Yeats, A. The trade diversion effects of MERCOSUR outweigh its trade creation effectsB. The fastest growing items in intra-MERCOSUR trade were capital-intensive goods produced efficiently in the member countriesC. MERCOSUR countries will be able to compete globally once the group's external trade barriers come downD. Countries with more efficient manufacturing enterprises are getting a level playing field because of MERCOSUR's reduction in trade barriers

Difficulty: Medium

79. (p. 295) In early 2006, six CARICOM members established the _____, which was modeled on the EU's single market. A. Central American Common MarketB. Central America Free Trade AgreementC. Caribbean Single Market and EconomyD. North American Free Trade Area

Difficulty: Medium

80. (p. 295) All of the following are seen as stumbling blocks toward the establishment of the Free Trade Area of the Americas except A. Brazil and Argentina want the United States to reduce its subsidies to U.S. agricultural producersB. United States wants its southern neighbors to agree to tougher enforcement of intellectual property rightsC. Brazil and Argentina want the United States to scrap tariffs on agricultural importsD. United States wants its southern neighbors increase manufacturing tariffs

Difficulty: Medium

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81. (p. 296) Which of the following is not true of ASEAN? A. Cambodia, Laos, Myanmar and Singapore are among its membersB. Its basic objective is to foster freer trade between member countries and to achieve cooperation in their industrial policesC. It has been highly successful in achieving cooperation in its industrial policiesD. It is pushing for free trade agreements with China, Japan and South Korea

Difficulty: Hard

82. (p. 297) Which of the following is true of the Asia-Pacific Economic Cooperation (APEC)? A. It was founded in 2001B. It currently has 57 member statesC. United States and Japan are not members of this bodyD. Collectively, the member states account for much of the growth in the world economy

Difficulty: Hard

83. (p. 297) Collectively, the _____ member states account for about 57 percent of the world's GNP and 46 percent of world trade. A. APECB. EUC. NAFTAD. MERCOSU

Difficulty: Medium

84. (p. 299) For international businesses, regional economic integration such as the EU A. Raises the costs of doing business in the regionB. Eliminates differences in culture allowing companies to standardize marketing activitiesC. Opens markets that had formerly been protectedD. Standardizes competitive practices enabling companies to realize substantial cost economies

Difficulty: Medium

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85. (p. 299) Which of the following is not a threat that emerges for international businesses as a result of regional economic integration? A. The business environment within each grouping becomes more competitiveB. There is a risk of being shut out of the single market by the creation of a "trade fortress"C. It limits the ability of firms to pursue the corporate strategy of their choiceD. The costs of doing business in a single market may fall

Difficulty: Medium

Essay Questions

86. (p. 276) Discuss the trend toward increased regional economic integration.

In recent years, there has been a strong move toward regional economic integration or agreements made by groups of countries in geographic regions to reduce and ultimately remove, tariff and nontariff barriers to the free flow of goods, services and factors of production between each other. In fact, by 2007, nearly all the WTO's members had notified the organization of participation in one or more regional trade agreements. By entering into regional agreements, groups of countries are hoping to reduce trade barriers more rapidly than can be achieved under the auspices of the WTO.

Difficulty: Medium

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87. (p. 277-278) What are the five levels of economic integration? Briefly describe each form.

There are five levels of economic integration. In a free trade area, all barriers to the trade of goods and services among member countries are removed. Each country, however is allowed to determine its own trade policies with regard to nonmembers. A customs union eliminates trade barriers between member countries and adopts a common external policy. A common market eliminates trade barriers between member countries and adopts a common policy towards nonmembers. In addition, factors of production are also allowed to move freely between member countries. Thus, labor and capital are free to move. An economic union eliminates trade barriers between member nations, adopts a common external policy and permits factors of production to move freely between member countries. In addition, a full economic union requires a common currency, harmonization of the member countries' tax rates and a common monetary and fiscal policy. The move toward economic union raises the issue of how to make a coordinating bureaucracy accountable to the citizens of member nations. The answer is through political union in which a central political apparatus coordinates the economic, social and foreign policy of the member states.

Difficulty: Medium

88. (p. 277-278) Which is the most enduring free trade area in the world? Briefly describe the same.

The most enduring free trade area in the world is the European Free Trade Association(EFTA). Established in January 1960, EFTA currently joins four countries—Norway, Iceland, Liechtenstein and Switzerland—down from seven in 1995. EFTA was founded by those Western European countries that initially decided not to be part of the European Community. The emphasis of EFTA has been on free trade in industrial goods. Agriculture was left out of the arrangement, each member being allowed to determine its own level of support. Members are also free to determine the level of protection applied to goods coming from outside EFTA.

Difficulty: Medium

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89. (p. 278) Compare and contrast a free trade area and a common market? Provide an example of each type of integration.

All barriers to the trade of goods and services among member countries are removed in a free trade area; however, each country maintains the right to establish its own policies toward nonmembers. In contrast, a common market eliminates barriers to trade between member countries, but also includes a common external trade policy towards non-members. The factors of production are also allowed to move freely between member countries. In addition, in a common market, labor and capital are free to move because there are no restrictions on immigration, emigration or cross-border flows of capital between member nations. The European Free Trade Area is an example of a free trade area. For years, the EuropeanUnion functioned as a common market, although it has now moved beyond this stage.

Difficulty: Easy

90. (p. 279) Discuss the economic case for economic integration. How does it relate to trade theory?

Economic theories of international trade predict that unrestricted free trade will allow countries to specialize in the production of goods and services so that they can produce most efficiently. Consequently, economic theory suggests that free trade and investment is a positive-sum game, in which all parties stand to gain. Regional economic integration is an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under the WTO.

Difficulty: Medium

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91. (p. 279) What is the political case for integration? How did political arguments influence the establishment of the European Union?

Linking neighboring economies and making them increasingly dependent on each other creates incentives for political cooperation between the neighboring stages and reduces the potential for violet conflict. Furthermore, by linking countries together, countries have greater clout and are politically much stronger in dealing with other nations. These considerations were instrumental in the establishment of the EU. Europe had suffered through two world wars in the first half of the century and the desire for unity was high. In addition, many Europeans felt that after World War II the European nation-states were no longer large enough to hold their own in world markets and world politics. The need for a united Europe to deal with the U.S. on one side and the former Soviet Union on the other loomed large in the minds of the EC's founders.

Difficulty: Medium

92. (p. 280) How easy is it for countries to integrate?

Even with strong economic and political support for integration, there are two impediments that make integration difficult in many cases. First, although economic integration typically benefits the majority of the people in a country, certain groups may lose. These groups are likely to be at the forefront of efforts to stop economic integration. Second, the issue of national sovereignty becomes important. In many cases, these impediments to integration are very difficult to overcome.

Difficulty: Medium

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93. (p. 280) Some economists have expressed concerns that the benefits of regional integration have been touted while the costs have been ignored. Explain the view of these economists.

While there is a general movement toward the establishment of regional free trade agreements, some economists have suggested that caution be used. According to these economists, the benefits of regional integration may have been overstated, while the costs have been ignored. They point out that the benefits of regional integration are determined by the extent of trade creation as opposed to trade diversion. Trade creation occurs when high-cost domestic producers are replaced by low-cost producers within the free trade area. It may also occur when higher-cost external producers are replaced by lower-cost external producers with the free trade area. Trade diversion occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area. A regional free trade agreement will benefit the world only if the amount of trade it creates exceeds the amount it diverts.

Difficulty: Medium

94. (p. 281) What prompted the formation of the European Union?

The European Union is the product of two political factors. First, the devastation of Western Europe during two world wars and the desire for lasting peace prompted countries to join forces. Second, the union was formed out of a desire by European nations to hold their own on the world's political and economic stage. Furthermore, many European were aware of the potential benefits that could arise from economic integration.

Difficulty: Medium

95. (p. 282-284) Briefly describe the four main institutions that make up the political structure of the EU.

There are four main institutions that make up the political structure of the EU. The European Commission is responsible for proposing EU legislation, implementing it and monitoring compliance with EU laws. The Council of the European Union represents the interests of member states. The European Parliament acts a consultative body and debates legislation proposed by the commission and forwarded to it by the council. Finally, the Court of Justice is the supreme appeals court for EU law.

Difficulty: Medium

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96. (p. 285) What is the Single European Act? What was the effect of the Single European Act on the EU economy? Did the Single European Act achieve its goals?

The Single European Act, which was adopted in 1987, committed member countries to work toward the establishment of a single market by December 31, 1992. The act proposed that all frontier controls between EC countries be removed, that the principle of mutual recognition be applied to product standards, that lower cost suppliers be permitted into national economies, that barriers to competition be lifted in the retail banking and insurance businesses, that all restriction on foreign exchange transactions between member countries be removed and that restrictions on cabotage be abolished. To signify the importance of the Act, the European Community also decided to change its name to the European Union. The Single European Act had a significant effect on the EU economy as it provided the impetus for restructuring substantial sections of European industry. Faster economic growth is a result.

Difficulty: Medium

97. (p. 287) Discuss the Maastricht Treaty. What did it accomplish?

The Maastricht Treaty, signed in 1991 by EC members, committed signatories to adopting a common currency, the euro, by 1999. The establishment of the euro created the second largest currency zone in the world, second only to the U.S. dollar. While the 12 participating countries locked their exchange rates against each other in 1999, euro notes and coins were not actually issued until 2002. By mid-2002, all prices and routine economic transactions within the euro zone were in euros.

Difficulty: Medium

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98. (p. 287-288) How will EU countries benefit from the establishment of a single currency? What, if any, are the costs of a single currency?

There were several reasons that promoted the establishment of the euro. First is the belief that businesses and individuals will realize significant savings from having to handle one currency rather than many. Second, the adoption of a common currency will make it easier to compare prices across Europe. Third, faced with lower prices, European producers will be forced to look for ways to reduce their production costs to maintain their profit margins. Fourth, the euro should give a strong boost to the development of a highly liquid pan-European capital market. Finally, the range of investment options open to both individuals and institutions will increase. However, in establishing a common currency, nations have had to give up control over monetary policy. Another drawback of the euro is that the EU is not what economists would call an optimal currency area or an area in which similarities in the underlying structure of economic activity make it feasible to adopt a single currency.

Difficulty: Medium

99. (p. 290-293) Debate the ratification of the North American Free Trade Agreement. Do you support the agreement? Why or why not? In your opinion, should NAFTA be expanded?

NAFTA is a free trade agreement between the U.S., Canada and Mexico. When the agreement was initially proposed in 1988, there was much debate as to whether the agreement should be ratified. Proponents of NAFTA argued that NAFTA should be seen as an opportunity to create an enlarged and more efficient productive based for the entire North American region. That while some lower-income jobs would move from the United States and Canada to Mexico, new jobs would be created in the U.S. and Canada as economic growth occurred in Mexico as a result of the job transfers. In addition, the international competitiveness of U.S. and Canadian firms that move production to Mexico to take advantage of lower labor costs will be enhanced, enabling them to better compete against Asian and European rivals. Those that opposed NAFTA claimed that U.S. and Canadian citizens would lose their jobs in alarming numbers as low-income positions were moved to Mexico to take advantage of lower wage rates. Environmentalists also voiced concerns about NAFTA. Because Mexico has more lenient environmental protection laws than either the U.S. or Canada, there was concern that U.S. and Canadian firms would relocate to Mexico to avoid the cost of protecting the environment. Finally, there was opposition in Mexico to NAFTA from those who feared a loss of national sovereignty. Mexican critics feared that NAFTA would allow their country to be dominated by U.S. and Canadian multinationals and Mexico would be used as a low-cost assembly site, while keeping their higher-paying jobs in their own countries.

Difficulty: Medium

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100. (p. 294-295) Explain how MERCOSUR has changed over time. What are the implications of these changes?

MERCOSUR originated in 1988 as a free trade pact between Brazil and Argentina. Initially the reductions in trade barriers resulting from the agreement led to an 80 percent increase trade between the two countries. Encouraged by this early success, the pact was expanded to include Paraguay and Uruguay. The initial objective was to establish a free trade area and move toward a full customs union. According to critics the effects of MERCOSUR outweigh its trade creation effects. MERCOSUR hit a significant roadblock in 1998, when its member states slipped into recession and intrabloc trade slumped. Trade fell further in 1999 following a financial crisis in Brazil that led to the devaluation of the Brazilian real. As of 2007, however, little progress had been made in moving MERCOSUR toward its goals. Critics feel that the customs union, if anything is becoming more imperfect over time.

Difficulty: Hard

101. (p. 295-296) Discuss the Free Trade Area of the Americas. What is hindering its progress? What is the position of the U.S. on the agreement? How does Brazil feel about the FTAA?

The Free Trade Area of the Americas (FTAA) was proposed in 1994. After several years, a goal was established to form the FTAA by 2005, a goal that was not met. Support for the movement has waned and the future of the proposed free trade area is in question. Two of the original advocates, the U.S. and Brazil, are sending mixed signals about the agreement. The U.S. wants the southern countries to commit to tougher enforcement of intellectual property rights and lower manufacturing tariffs, requests that have so far fallen on deaf ears. Similarly, Argentina and Brazil want the U.S. to reduce agricultural subsidies and put an end to tariffs on agricultural products. The U.S. has thus far, ignored these requests. If countries can overcome these obstacles, the proposed market would involve more than 850 million people.

Difficulty: Medium

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102. (p. 296) What is ASEAN? What is its basic goal? How successful is ASEAN?

The Association of Southeast Asian Nations (ASEAN) was formed in 1967. The grouping, which includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam, creates a regional grouping of 500 million people. The basic goal of ASEAN is to foster freer trade between member countries and to achieve cooperation in their industrial policies. To date however, progress has been limited.The ASEAN Free Trade Area came into effect in 2003 between the original six members of ASEAN and has been successful at cutting tariffs on manufacturing and agricultural products to less than 5 percent.

Difficulty: Medium

103. (p. 299) Describe the state of economic integration in Africa. What factors have hindered the process?

There have been efforts to establish trading bloc in Africa for half a century, however meaningful progress has been slow. Political turmoil in several nations has hindered the process as has the suspicion that free trade will result in unfair foreign competition. The most recent effort at integration came in 2001 when Kenya, Uganda and Tanzania attempted to establish a customs union, regional court, legislative assembly and eventually a political federation.

Difficulty: Medium

104. (p. 299) Consider the opportunities arising from the creation of the EU for international businesses.

The creation of a single market through regional economic integration presents significant opportunities to companies. Countries within the EU, such as Italy and France, are now much more open to foreign competition. Companies should also see their costs drop as they do business in a single, large market as opposed to 25 small ones. Production can be centralized in the EU location where the mix of factor costs and skills is optimal.

Difficulty: Medium

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105. (p. 300-301) Describe the disadvantages of economic integration for international businesses. How can firms protect themselves from these threats?

Economic integration presents a number of difficulties for companies. Certainly, the more competitive business environment that will result from integration would be considered a disadvantage. To survive, firms will have to capitalize on the opportunities presented by the creation of an integrated marketplace and rationalize their production and reduce their costs. Companies that are outside of trading areas such as the EU may find themselves facing a trade fortress with high barriers to imports and investment. Consequently, firms may find that to protect themselves, they will need to establish operations "on the inside." Finally, firms may find their strategic choice limited by restrictions on proposed acquisitions and mergers. Firms may find that they must make significant concessions in order for their proposed plans to move ahead.

Difficulty: Medium

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Date post:	01-Nov-2014
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International Business Quiz

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