Chapter 7 – Regional Economic Integration and Cooperative Agreements

 

Multiple Choice Questions

 

WHY IS GEOGRAPHIC PROXIMITY AN IMPORTANT REASON FOR ECONOMIC INTEGRATION?

 

1.      _______________ is an important reason for economic integration.

a.      Geographic proximity (moderate, page 206)

b.      Democracy

c.       Totalitarianism

d.      Common law practice

 

2.      Neighboring countries tend to collaborate for all of the following reasons EXCEPT:

a.       the distance that goods need to travel between such countries is short

b.      neighboring countries tend to be in similar economic situations and therefore are able to better control currency exchange rates (difficult, page 206)

c.       consumers’ tastes are likely to be similar, and distribution channels can be easily established in adjacent countries

d.      neighboring countries may have a common history and interests, and may be more willing to coordinate their policies

 

3.      Geographic proximity is an important reason for economic integration because consumer tastes are likely to be:

a.       different.

b.      opposite.

c.       similar. (easy, page 206)

d.      strange.

 

WHAT ARE THE TYPES OF ECONOMIC INTEGRATION AND THE DIFFERENCES AMONG THESE TYPES?

 

4.      Which of the following types of regional economic integration focuses only on eliminating internal tariffs?

a.       customs union

b.      common market

c.       complete economic integration

d.      free trade area (moderate, page 206)

 

5.      In which of the following types of regional economic integration are internal tariffs eliminated with member countries levying a common external tariff on goods being imported from nonmembers.

a.      customs union (moderate, page 206)

b.      free trade area

c.       common market

d.      complete economic integration

 

6.      A _______________ focuses on eliminating internal tariffs with member countries levying a common external tariff on goods being imported from nonmembers. Additionally, this type of regional economic integration allows free mobility of production factors such as labor and capital.

a.       free trade area

b.      common market (moderate, page 206)

c.       customs union

d.      complete economic integration


 

7.      In _______________, countries focus on eliminating internal tariffs among member countries, have a common external trading policy among nonmembers, allow free mobility of productions factors within member countries, and adopt common economic policies.

a.       free trade area

b.      customs union

c.       complete economic integration (moderate, page 206)

d.      common market

 

EXPLAIN THE STATIC EFFECTS AND DYNAMIC EFFECTS OF ECONOMIC INTEGRATION

 

8.      _______________ of integration are the shifting of resources from inefficient to efficient companies as trade barriers fall.

a.       Dynamic effects

b.      Regional effects

c.       Global effects

d.      Static effects (moderate, page 207)

 

9.      The overall growth in the market and the impact on a company of expanding production and achieving greater economies of scale is called _______________ of integration.

a.      dynamic effects (moderate, page 207)

b.      static effects

c.       regional effects

d.      global effects

 

10.    When trade barriers come down and the size of the market increases, this is known as _______________ of integration.

a.       static effects

b.      dynamic effects (moderate, page 207)

c.       regional effects

d.      global effects

 

WHAT IS THE DIFFERENCE BETWEEN TRADE CREATION AND TRADE DIVERSION RESULTING FROM ECONOMIC INTEGRATION?

 

11.    _______________ occurs when production shifts to more efficient producers for reasons of comparative advantage, allowing consumers access to more goods at a lower price than would have been possible without integration.

a.       Trade diversion

b.      Divestment

c.       Trade creation (moderate, page 207)

d.      Retrenchment

 

12.    _______________ occurs when trade shifts to countries in the group at the expense of trade with countries not in the group, even though the nonmember country might be more efficient in the absence of trade barriers.

a.       Trade creation

b.      Divestment

c.       Retrenchment

d.      Trade diversion (moderate, page 207)


 

13.    Dynamic effects of integration occur when trade barriers _____________ and the size of the market __________.

a.      fall; increases (moderate, page 207)

b.      rise; increases

c.       rise, decreases

d.      fall; decreases

 

WHAT ARE THE FUNCTIONS OF THE EUROPEAN COMMISSION, EUROPEAN COUNCIL, EUROPEAN PARLIAMENT, AND THE EUROPEAN COURT OF JUSTICE?

 

14.    _______________ is a collection of 25 different councils representing the different ministries in each country. They have the final say over legislation in conjunction with Parliament.

a.       The European Council

b.      The Council of Ministers (moderate, page 208)

c.       The World Trade Organization

d.      The United Nations

 

15.    _______________ is comprised of the heads of state and government of each member country.

a.       The Council of Ministers

b.      The World Trade Organization

c.       The European Council (moderate, page 208)

d.      The United Nations

 

16.    The major responsibilities of the European Parliament include all of the following EXCEPT:

a.       legislative power

b.      control over budget

c.       supervision of executive decisions

d.      control over religious beliefs (moderate, page 206)

 

17.    The _______________ is an appeals court for individuals, firms, and organizations fined by the Commission for infringing Treaty Law.

a.      European Court of Justice (moderate page 210)

b.      World Trade Organization

c.       United Nations

d.      European Council

 

18.        The Single European Act, passed in 1987,:

a.       created the value-added tax.

b.      was designed to eliminate the remaining nontariff barriers to trade in Europe (difficult, page 211).

c.       resulted in the EU leaving the World Trade Organization because of disagreements with the U.S. over trade issues.

d.      unified all of the different free trade agreements in Europe into one major group.

 

 

WHAT IS THE EURO AND THE RATIONALE FOR IT?

 

19.    The most significant aspect of the Maastricht agreement was the decision to move to a common currency in Europe, with the new currency being called:

a.       the dollar

b.      the euro (euro, page 212)

c.       the yen

d.      the peso

 

20.    The Euro is being administered by the _______________, which was established on July 1, 1998.

a.       World Trade Organization

b.      United Nations

c.       European Central Bank (moderate, page 212)

d.      Ministry of Finance

 

21.    The _______________ is responsible for setting monetary policy and managing the exchange rate system for all of Europe since January 1, 1999.

a.       World Trade Organization

b.      United Nations

c.       Ministry of Finance

d.      European Central Bank (moderate, page 212)

 

22.    All of the following are TRUE regarding the Euro EXCEPT it:

a.      is a common currency in Europe and NAFTA (moderate, page 212).

b.      is administered by the European Central Bank.

c.       was established on January 1, 1999.

d.      resulted in new bank notes being issued in 2002.

 

23.     Which of the following is true concerning EU expansion?

a.       The EU Council of Ministers wants to expand membership, but the European Parliament does not.

b.      The next round of expansion will include NAFTA so that the EU can diversify from its strictly

       European base.

c.       Most of the new members included in the current round of expansion are from Central

      Eastern Europe (moderate, page 213).

d.      Expansion will result in a stronger role and voice for the original members, such as Germany and

       France.

 

WHAT WAS THE RATIONALE FOR NAFTA?

 

24.    Which of the following was developed with the rationale that the U.S.-Canadian trade was the largest bilateral trade in the world and that the United States is Mexico’s and Canada’s largest trading partner?

a.       CEFTA (the Central European Free Trade Agreement)

b.      NAFTA (the North American Free Trade Agreement) (moderate, page 215)

c.       ASEAN (Association of South East Asian Nations)

d.      EU (the European Union)

 

25.    NAFTA calls for all of the following EXCEPT:

a.       the harmonization of trade rules

b.      the liberalization of restrictions on services

c.       the implementation of a common currency (moderate, page 215)

d.      the liberalization of restrictions on foreign investment

 

26.    NAFTA is a good example of:

a.       trade erosion.

b.      divestment.

c.       retrenchment.

d.      trade diversion. (moderate, page 215)


 

WHAT ARE THE RULE OF ORIGIN AND LOCAL CONTENT PROVISIONS OF NAFTA?

 

27.    _______________ refers to the percentage of value that must be from North America for the product to be considered “North American” in terms of country of origin.

a.      Local content (moderate, page 217)

b.      Foreign standards

c.       Quotas

d.      Sanction

 

28.    _______________ ensure that only goods that have been the subject of substantial economic activity within the free trade area are eligible for the more liberal tariff conditions created by the NAFTA.

a.       Rules of trade

b.      Rules of origin (moderate, , page 217)

c.       Rules of engagement

d.      Rules of agreement

 

29.    The local content requirement for a product to be considered “North American” in terms of country of origin is which of the following?

a.       15% for most products; 25% for most autos

b.      50% for most products; 15% for most autos

c.       50% for most products; 62.5% for most autos (difficult, page 217)

d.      75% for most products; 15% for most autos

 

30.    NAFTA has resulted in:

a.       no significant increase in trade among the member countries.

b.      more FDI by U.S. companies going into Mexico than into Canada.

c.       the elevation of Mexico to the largest recipient of U.S. foreign direct investment of any country in Latin

      America.

d.      a greater increase of Mexican exports to the United States than U.S. exports to Mexico.

   (difficult, page 218)

 

 

 

WHAT ARE THE MAJOR REGIONAL TRADING GROUPS IN AFRICA, LATIN AMERICA, AND ASIA?

 

31.    The major trade group in South America is:

a.       NAFTA (the North American Free Trade Agreement)

b.      CEFTA (the Central European Free Trade Agreement)

c.       ANCOM (Andean Common Market)

d.      MERCOSUR (moderate, page 221)

 

32.     The major trade agreement involving Brazil, Argentina, Uruguay and Paraguay:          

a.       is stable because of the relative size and economic stability of Argentina and Brazil.

b.      is a good trade agreement due to the relatively similar size of the four partners.

c.       is likely not to increase in size due to the relative small economies of South America.

d.      is trying to be a customs union rather than just a free trade agreement.  (difficult, page 221)

 

33.    The _______________ is the second most important regional group in South America.

a.      ANCOM (Andean Common Market) (moderate, page 221)

b.      EFTA (the European Free Trade Association)

c.       NAFTA (the North American Free Trade Agreement)

d.      CEFTA (the Central European Free Trade Agreement)


 

34.       The Andean Common Market:

a.       is significant in size since it involves 80% of the GNP of South America.

b.      has traditionally been very isolationist and protectionist but is trying to open up more

      (difficult page 221).

c.       Is the oldest trading group in Latin America.

d.      Is the only South American trading group that also includes Mexico.

 

35.    _______________ is a relatively successful free trade area in South Asia that relies more on the U.S. market for exports than each other.

a.       EFTA (the European Free Trade Association)

b.      ASEAN (Association of South East Asian Nations) (moderate, page 222)

c.       CEFTA (the Central European Free Trade Agreement)

d.      NAFTA (the North American Free Trade Agreement)

 

36.    _______________ was formed in November 1989 to promote multilateral economic cooperation in trade and investment in the Pacific Rim.

a.       CEFTA (the Central European Free Trade Agreement)

b.      NAFTA (the North American Free Trade Agreement)

c.       APEC (the Asia Pacific Economic Cooperation) (moderate, page 222)

d.      ASEAN (Association of South East Asian Nations)

 

37.    The Association of South East Asian Nations:

a.       has officially formed a free trade association. (difficult, page 222).

b.      is comprised of all countries that border the Pacific Rim.

c.       is hampered by the size of the Association and the geographic distance between member countries.

d.      all of the above

 

WHAT IS THE PURPOSE OF COMMODITY AGREEMENTS?

 

38.    A(n) _______________ is designed to stabilize the price and supply of a good.

a.       foreign exchange control

b.      quota

c.       subsidy

d.      commodity agreement (moderate, page 225)

 

39.    Commodity agreements are of two basic types,:

a.      producers’ alliances and international commodity control agreements. (difficult, page 225)

b.      producers’ alliances and consumers’ alliances.

c.       consumers’ alliances and international commodity control agreements.

d.      producers’ alliances and governmental alliances.


 

40.    Which of the following are exclusive membership agreements between producing and exporting countries, such as OPEC?

a.       consumers’ alliances

b.      producers’ alliances (moderate, page 225)

c.       governmental alliances

d.      international commodity control agreements

 

41.    _______________ are agreements between producing and consuming countries.

a.       Consumers’ alliances

b.      Producers’ alliances

c.       International commodity control agreements (moderate, page 225)

d.      Governmental alliances

 

CONTRAST THE BUFFER STOCK SYSTEM AND THE QUOTA SYSTEM FOR COMMODITY AGREEMENTS.

 

42.    A commodity agreement by which reserve stocks of the good are bought and sold to regulate the price is called a:

a.       consumer alliance.

b.      producer alliance.

c.       international commodity control agreement.

d.      buffer-stock system. (moderate, page 225)

 

43.    A _______________ is where producing countries divide total output and sales to stabilize the price of a product.

a.      quota system (moderate, page 225)

b.      subsidy

c.       buffer-stock system

d.      international commodity control agreement

 

44.    The _______________ is most effective when a single country has a large share of world production or consumption because they are able to control supply much more easily.

a.       subsidy

b.      quota system (moderate, page 225)

c.       buffer-stock system

d.      international commodity control agreement

 

45.    Which of the following is an example of a producer cartel?

a.       ASEAN

b.      EU

c.       OPEC (moderate, page 225)

d.      MERCUSOR

 

46.     Which of the following does NOT accurately reflect the Organization of Petroleum Exporting Countries?

a.       It is a producers’ alliance.

b.      It is an international commodity control agreement.

c.       It uses a quota system.

d.      It includes all major petroleum exporting countries. (difficult, page 225)


 

WHAT IS THE RELATIONSHIP BETWEEN THE ENVIRONMENT AND INTERNATIONAL COOPERATIVE AGREEMENTS?

 

47.    The _______________ is a political organization comprised of 185 countries, and it is headquartered in New York City. This organization deals with a variety of political issues, such as security and world peace, but it also deals in humanitarian and economic issues.

a.       World Trade Organization

b.      World Bank

c.       European Union

d.      United Nations (moderate, page 227)

 

48.    The problem with international environmental agreements is that:

a.      countries differ significantly in how they deal with environmental issues.  (moderate, page 227)

b.      developing countries are much more anxious than industrial countries to adopt environmental standards.

c.       corporate cooperation with the agreements reduces profits and results in criticism of corporate compliance.

d.      all of the above

 

49.    The major source of influence for global environmental agreements is the:

a.       World Bank.

b.      United Nations. (easy, page 227)

c.       European Union.

d.      NAFTA.

 

Essay Questions

 

50.    Describe the different types of regional economic integration, and give an example of each type.

 

         Answer

a.       Free-trade area (FTA) –The goal of a free-trade area is to abolish all tariffs between member countries. Free trade agreements usually begin modestly by eliminating tariffs on goods that already have low tariffs, and there is usually an implementation period over which all tariffs are eliminated on all products. In addition, each member country maintains its own external tariff against non-FTA countries. Examples – the European Free Trade Association, the Central European Free Trade Agreement, the North American Free Trade Agreement, and Association of South East Asian Nations.

b.      Customs union – In addition to eliminating internal tariffs, member countries levy a common external tariff on goods being imported from nonmembers. Example – MERCOSUR

c.       Common market – A common market has all the elements of a customs union plus it allows free mobility of production factors such as labor and capital. Examples – the Caribbean Community and Common Market, the Central American Common Market, the Andean Group.

d.      Complete economic integration – Complete economic integration has all the elements of a common market and creates even greater economic harmonization through the adoption of common economic policies. Example – the European Union

(moderate, page 206)

 

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

 

         Answer

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

 

a.       trade creation – production shifts to more efficient producers for reasons of comparative advantage, allowing consumers access to more goods at a lower price than would have been possible without integration.

b.      trade diversion – trade shifts to countries in the group at the expense of trade with countries not in the group, even though the nonmember company might be more efficient in the absence of trade barriers.

 

Dynamic effects of integration occur when trade barriers come down and the size of the market increases.

(easy, page 207)

 

52.    What are the functions of the European Commission, the European Parliament, the Council of Ministers, and the European Court of Justice.

           

Answer

a.       The European Commission provides the European’s political leadership and direction. The original intent was for the Commission to act as a supranational government for Europe. There are three distinct functions of the Commission: (1) initiating proposal for legislation, (2) guardian of the Treaties, (3) the manager and executor of Union policies and of international trade relationships. The legislative process begins with a proposal from the Commission, which gathers input from various national constituencies and tries to determine what is in the best interest of the Community at large. As guardian of the treaties, the Commission determines whether or not Member States are correctly applying EU legislation. If the countries are not, the Commission may fine the countries or firms, subject to appeal by the Court of Justice. Finally, the Commission manages the annual budget of the EU, manages the EU, and negotiates trade agreements.

b.      The three major responsibilities of the European Parliament are: legislative power, control over the budget, and supervision of executive decisions. The Commission presents community legislation to the Parliament. Parliament may approve legislation, amend it, or reject it outright. Parliament also approves the EU’s budget each year and monitors spending.

c.       The Council is also known as the Council of Ministers, which is composed of different ministers of the member countries. The European Council is important because it sets priorities, gives political direction, and resolves issues that the Council of Ministers cannot resolve.

d.      The European Court of Justice ensures consistent interpretation and application of EU treaties. Member States, Community institutions, or individuals and companies may bring cases to the Court. The Court of Justice is an appeals court for individuals, firms, and organizations fined by the Commission for infringing Treaty Law. The reason why the Court of Justice is relevant to MNCs is because it deals mostly with economic matters.

(difficult, page 208)

 

53.    What was the rationale for NAFTA?

 

         Answer

NAFTA, which include Canada, the United States, and Mexico, went into effect in 1994, but it originated with the Canada-U.S. Free Trade Agreement. The United States and Canada historically have had various forms of mutual economic cooperation. In February 1991, Mexico approached the United States to establish a free-trade agreement. The formal negotiations that began in June 1991 included Canada. The resulting North American Free Trade Agreement became effective on January 1, 1994. NAFTA has a logical rationale, in terms of both geographic location and trading importance. Although Canadian-Mexican trade was not significant when the agreement was signed, U.S.-Mexican and U.S.-Canadian trade was. The two-way trading relationship between the United States and Canada is the largest in the world. NAFTA provides the static and dynamic effects of economic integration. For example, Canadian and U.S. consumers benefit from lower-cost agricultural products from Mexico, a static effect of economic liberalization. U.S. producers also benefit from the large and growing Mexican market, which has a huge appetite for U.S. products—a dynamic effect.

         (moderate, page 215)


 

54.    What are the rules of origin and local content provisions of NAFTA?

 

         Answer

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

         (moderate, page 217)

 

55.    What has been the impact of NAFTA on trade and employment?

 

Answer

         Since NAFTA has been in place, the U.S., Canada, and Mexico have tripled their business dealings with trade among the countries equaling $1.7 billion per day. U.S. exports to Mexico have increased, but Mexican exports to the U.S. have surged even more.  The investment and employment picture are far more complicated. One concern for U.S. workers was that investment would move to Mexico due to lower wages and lax environmental standards in Mexico. 

         (moderate, page 218)

 

56.    What are the major regional trading groups in Africa, Latin America, and Asia?

 

         Answer

a.   The major trade group in South America is MERCOSUR. In 1991, Brazil, Argentina, Paraguay, and      Uruguay established MERCOSUR as a subregional group ALADI. MERCOSUR is significant because of its size; the four original members generate 80% of South America’s GNP. Although the Andean Common Market is not as significant economically as MERCOSUR, it is the second most important regional group in South America.

b.  The Association of South East Asian Nations (ASEAN), organized in 1967, comprises Brunei,  Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. It is promoting cooperation in many areas, including industry and trade. Member countries are protected in terms of tariff and nontariff barriers.

(moderate, page 221)

 

57.    What is the purpose of commodity agreements?

 

         Answer

Commodity agreements are of two basic types: producers’ alliances and international commodity control agreements (ICCAs). Producers’ alliances are exclusive membership agreements between producing and exporting countries. Examples are Organization of Petroleum Exporting Countries (OPEC) and the Union of Banana Exporting Countries. ICCAs are agreements between producing and consuming countries. Examples of ICCAs are the International Cocoa Organization (ICCO) and the International Sugar Organization. Most developing countries traditionally have relied on the export of one or two commodities to supply the foreign currencies from industrial countries they need for economic development. However, commodity prices are not stable. One approach to counteract price instability was the buffer-stock system. A buffer-stock system is a partially managed commodity agreement that a central agency monitors. Another approach is a quota system, where producing countries divide total output and sales to stabilize the price. For the quota system to work, participating countries must cooperate among themselves to prevent sharp fluctuations in supply. The quota system is most effective when a single country has a large share of world production or consumption because they are able to control supply much more easily.

(moderate, page 225)