Chapter 7 Government Intervention and Regional Economic Integration

International Business: The New Realities, 4e (Cavusgil)
Chapter 7 Government Intervention and Regional Economic Integration
1) ________ is at odds with free trade, the unrestricted flow of products, services, and capital
across national borders.
A) Lower-cost import
B) Trade openness
C) FDI
D) Factors of production
Answer: B
Diff: 1: Easy
Skill: Concept
Objective: 7-1: Understand the nature of government intervention
AACSB: Analytical Thinking
2) Which of the following situations is an example of country risk?

A) Fiesta Corp. is an automobile manufacturer based in the U.S. The company's negotiation
attempts with China to open a manufacturing factory in Beijing failed owing to cultural
differences.
B) Frostees Inc. is a food and beverages company based in the U.S. Its attempt to set up an outlet
in Thailand failed primarily owing to a misinterpretation of the memorandum of understanding
by a potential business partner in Thailand.
C) Alpha Corp., a rice manufacturer based in Pakistan, suffered losses when the U.S. Department
of Commerce decided to impose tariffs on the import of paddy rice to avoid competition for the
domestic industry.
D) Tamiaz LLC is a U.S. based manufacturer of clothing with outlets in China, Vietnam, and
India. The company incurred a loss due to delayed payments from India owing to fluctuations in
the currency exchange rates.
Answer: C
Diff: 2: Moderate
Skill: Application
3) ________ are checkpoints at the ports of entry in each country where government officials
inspect imported products and levy tariffs.
A) Nontariff trade barriers
B) Customs
C) Quotas
D) Subsidies
Answer: B
Diff: 1: Easy
Skill: Concept
1
Copyright © 2017 Pearson Education, Inc.
4) A government policy that impedes trade through means other than explicit tariffs is known as
a(n) ________.
A) investment incentive
B) subsidy
C) maquiladora
D) nontariff trade barrier
Answer: D
Diff: 1: Easy
Skill: Concept
5) Which of the following refers to an often-used form of nontariff trade barrier?

A) premium
B) subsidy
C) quota
D) grant
Answer: C
Diff: 1: Easy
Skill: Concept
6) A quantitative restriction on specific imports for a set period of time is referred to as

________.
A) tariff
B) quota
C) investment barrier
D) country risk
Answer: B
Diff: 1: Easy
Skill: Concept
2
7) Which of the following is an example of nontariff trade barrier?
A) Gayle Inc. is a U.S.-based retailer that imports cosmetic products manufactured in Thailand.
These products pass through U.S. customs and are subject to a 5 percent import duty.
B) The U.S. imports chocolates manufactured in Belgium that cost $65 a box with taxes.
C) The U.S. Department of Commerce announced that white sugar imports will be limited to
7,500 million tons.
D) Spices imported from India to the U.S. for sale in the domestic market are subject to a 10
percent import duty.
Answer: C
Diff: 2: Moderate
Skill: Application
8) Protectionist policies may also lead to ________.

A) price inflation
B) increased choices for buyers
C) easy availability of products
D) high incentive to improve quality
Answer: A
Diff: 2: Moderate
Skill: Application
9) Governments impose offensive barriers to ________.

A) protect domestic industries
B) promote national security
C) increase employment
D) safeguard the interests of special interest groups
Answer: C
Diff: 1: Easy
Skill: Concept
10) Governments impose defensive barriers to ________.

A) generate tax revenues
B) increase employment
C) pursue strategic policy objectives
D) promote national security
Answer: D
Diff: 1: Easy
Skill: Concept
3
11) Blocking imports ________.
A) increases the availability of raw materials
B) increases the availability of products sold in the home market
C) reduces the availability of products sold in the home market
D) decreases the cost of products sold in the home market
Answer: C
Diff: 1: Easy
Skill: Concept
12) Which of the following is true with regard to protectionism?

A) It increases the availability of raw materials for domestic industries.
B) It decreases the cost of products sold in the home market.
C) It increases the availability of products sold in the home market.
D) It can trigger retaliation from foreign governments, which reduces sales prospects for exports.
Answer: D
Diff: 2: Moderate
Skill: Concept
13) Which of the following statements is true about protection of an infant industry?
A) Governments can impose temporary trade barriers on foreign imports to ensure that young
firms gain a large share of the domestic market.
B) Such protection is easy to remove.
C) Protected companies become more efficient and produce products with lower prices.
D) Protecting infant industries rarely allows countries to develop a modern industrial sector.
Answer: A
Diff: 2: Moderate
Skill: Concept
14) ________ refers to a government measure intended to manage or prevent the export of
certain products or trade with certain countries.
A) Quota
B) Export control
C) Customs
D) Subsidy
Answer: B
Diff: 1: Easy
Skill: Concept
4
15) Governments impose export controls for the purpose of ________.
A) improving available opportunities for domestic sales
B) boosting derived demand in the domestic market
C) preventing the export of certain products to certain countries
D) boosting derived demand in foreign markets
Answer: C
Diff: 1: Easy
Skill: Concept
16) Which of the following is an example of an offensive rationale for government intervention?
A) The government of Erbia imposes trade restrictions on the export of plutonium to certain
countries.
B) The government of Berylia imposes a trade barrier to curtail the import of low-priced
products from manufacturers in the developed economies.
C) The government of Argonia imposes investment barriers to safeguard special interest groups.
D) The government of Rhodia requires foreign companies to enter its huge markets through joint
ventures with local firms.
Answer: D
Diff: 2: Moderate
Skill: Application
17) The Chinese government's policy of requiring foreign firms to enter the Chinese market via
joint ventures is intended to ________.
A) limit the amount of FDI
B) create jobs for Chinese workers
C) protect China's national security
D) stimulate foreign investment
Answer: B
Diff: 1: Easy
Skill: Application
18) Governments intervene in international trade and investments in order to protect the interests
of foreign investment firms.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
5
19) A nontariff trade barrier is a government policy, regulation, or procedure that impedes trade
through means other than explicit tariffs.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
20) Governments impose offensive barriers to safeguard industries, workers, and special interest
groups and to promote national security.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
21) Governments impose defensive barriers to pursue strategic or public policy objectives, such
as increasing employment or generating tax revenues.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
22) Governments often impose trade barriers to restrict imports of products or services seen to
threaten national assets.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
23) Nations with economies based on agriculture and textile manufacturing generate more
economic revenue than do nations with many high-tech industries.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
6
24) In a short essay, describe two methods of government intervention and explain the four
major defensive motives for government intervention.
Answer: Government intervention is often motivated by protectionism. Protectionism refers to
national economic policies designed to restrict free trade and protect domestic industries from
foreign competition. Protectionism is typically manifested by tariffs, nontariff barriers such as
quotas, and arbitrary administrative rules designed to discourage imports. A tariff is a tax
imposed by government on imported products, effectively increasing cost of acquisition for the
customer. A nontariff trade barrier is a government policy, regulation, or procedure that impedes
trade through means other than explicit tariffs.
Four major defensive motives are particularly relevant: protection of the nation's economy,
protection of an infant industry, national security, and national culture and identity.
1. PROTECTION OF THE NATIONAL ECONOMY : Proponents argue that firms in advanced
economies cannot compete with those in developing countries that employ low-cost labor.
Protectionists demand trade barriers to curtail the import of low-priced products. The action is
intended to protect jobs and ensure higher wages for workers in advanced economies.
2. PROTECTION OF AN INFANT INDUSTRY: In an emerging industry, companies are often
inexperienced and lack the latest technologies and know-how. They also may lack the large size
typical of competitors in established industries abroad. A very young industry may need
temporary protection from foreign competitors. A government may impose temporary trade
barriers on foreign imports to ensure that young firms gain a large share of the domestic market.
3. NATIONAL SECURITY: Countries impose trade restrictions on products viewed as critical
to national defense and security. These include military technology and computers that help
maintain domestic production in security-related products.
4. NATIONAL CULTURE AND IDENTITY: Governments may impose trade barriers to restrict
imports of products or services seen to threaten such national assets. In the United States,
authorities opposed Japanese investors' purchase of the Seattle Mariners baseball team because it
is viewed as part of the national heritage. France does not allow significant foreign ownership of
its TV stations because of concerns about foreign influence on French culture.
Diff: 2: Moderate
Skill: Synthesis
AACSB: Analytical Thinking; Environments and Reflective Thinking
25) In a short essay, describe the negative effects to the economy when a government intervenes
in international trade.
Answer: Critics counter that protectionism is at odds with the theory of comparative advantage,
according to which nations should engage in more international trade, not less. Trade barriers
interfere with country-specific specialization of labor. When countries specialize in the products
that they can produce best and then trade for the rest, they perform better in the long run,
delivering superior living standards to their citizens. Critics also charge that blocking imports
reduces the availability and increases the cost of products sold in the home market. Industries
cannot access all the input products they need. Finally, protection can trigger retaliation, whereby
foreign governments impose their own trade barriers, reducing sales prospects for exporters.
Diff: 2: Moderate
Skill: Concept
7
26) The United Nations estimated that trade barriers alone cost developing countries ________
in lost trading opportunities with developed countries every year.
A) $100 billion
B) $200 billion
C) less than $100 billion
D) more than $500 billion
Answer: D
Diff: 1: Easy
Skill: Concept
Objective: 7-2: Know the instruments of government intervention
27) Typically, administrative and bureaucratic procedures ________.

A) speed up the investment activities of firms
B) hinder the activities of importers
C) boost investment activities
D) harm late importers
Answer: B
Diff: 1: Easy
Skill: Concept
28) ________ refer to rules that limit the ability of foreign firms to invest in certain industries or
acquire local firms.
A) Quotas
B) Regulations and technical standards
C) FDI and ownership restrictions
D) Administrative and bureaucratic procedures
Answer: C
Diff: 1: Easy
Skill: Concept
8
29) In Cadmia, foreign-owned automobile manufacturing companies must be managed by a
Cadmian national and most board members must be Cadmian citizens. This exemplifies
________.
A) FDI and ownership restrictions
B) administrative and bureaucratic procedures
C) Regulations and technical standards
D) Anti-dumping duty
Answer: A
Diff: 2: Moderate
Skill: Application
30) Products are classified under about 8,000 different unique codes in the ________ schedule, a
standardized system used worldwide.
A) harmonized tariff
B) protective tariff
C) revenue tariff
D) specific tariff
Answer: A
Diff: 1: Easy
Skill: Concept
31) Tariffs that are ad valorem are ________.

A) based on the weight or size of the imported product
B) assessed as a percentage of the imported product's value
C) intended to provide a steady flow of income for the government
D) charged regardless of the imported product's value
Answer: B
Diff: 1: Easy
Skill: Concept
32) Under the ________, Canada, Mexico, and the United States have eliminated nearly all
tariffs on product imports from each other.
A) APEC
B) FTAAP
C) GATT
D) NAFTA
Answer: D
Diff: 1: Easy
Skill: Concept
9
33) ________ represent a major driver of market globalization.
A) Continued reductions
B) Export controls
C) Import controls
D) Prohibitive tariffs
Answer: A
Diff: 1: Easy
Skill: Concept
34) Nontariff trade barriers have increased in popularity partly because they ________.
A) generate profits for foreign firms
B) are easier to conceal from the WTO
C) restrict trade by imposing direct tax
D) have been fairly successful in eliminating smuggling along international borders
Answer: B
Diff: 1: Easy
Skill: Concept
35) An import license refers to a(n) ________.

A) tax charged on an imported product whose price is below usual prices in the local market
B) list of complex procedures imposed on importers that hinder trade and investment
C) complicated system of establishing quotas
D) government authorization granted to a firm for importing a product
Answer: D
Diff: 1: Easy
Skill: Concept
36) The so-called ________ specifies that a certain proportion of products and supplies, or of
intermediate goods used in local manufacturing, must be produced within the bloc.
A) safe harbor
B) local content requirement
C) rules of origin requirement
D) ad valorem tariff
Answer: C
Diff: 1: Easy
Skill: Concept
10
37) Restrictions on the outflow of hard currency from a country or on the inflow of foreign
currencies is called ________.
A) antidumping duty
B) currency appreciation
C) currency control
D) currency depreciation
Answer: C
Diff: 1: Easy
Skill: Concept
38) Governments sometimes retaliate against subsidies by imposing ________, tariffs on

products imported into a country to offset subsidies given to producers or exporters in the
exporting country.
A) local content requirements
B) investment incentives
C) countervailing duties
D) antidumping duties
Answer: C
Diff: 1: Easy
Skill: Application
39) Which of the following may allow a manufacturer to practice dumping?

A) countervailing duties
B) subsidies
C) currency control
D) import license
Answer: B
Diff: 1: Easy
Skill: Concept
40) ________ are transfer payments or tax concessions made directly to foreign firms to entice
them to invest in the country.
A) Investment incentives
B) Antidumping duties
C) Countervailing duties
D) Quotas
Answer: A
Diff: 1: Easy
Skill: Concept
11
41) Governments support domestic industries by ________.
A) incentivize dumping
B) increase the costs of production of domestic industries
C) alienate domestic industries
D) adopting procurement policies that restrict purchases to home-country suppliers
Answer: D
Diff: 2: Moderate
Skill: Concept
Cotton Quota (Scenario)

Cotton growers in the nation of Zanzi export nearly 700,000 bales of cotton every year. Zanzi is
the home country for a fabric manufacturing facility that exports high-quality cotton fabric
around the world. The government imposed a quota of 1 million bales of cotton that can be
imported into Zanzi every year. The local fabric manufacturer is lobbying the government to
remove the quota on cotton.
42) Which of the following questions would be most important for government officials to
evaluate when considering the controversy over the cotton quota?
A) What would be the short-term effect of additional agricultural quotas?
B) What other nations utilize agricultural quotas and what are the effects?
C) Does the government of Zanzi impose heavy duties on dumping?
D) What will be the long-term effect of the cotton quota on the Zanzi economy?
Answer: D
Diff: 3: Hard
Skill: Critical Thinking
43) Which of the following most supports abolishing the cotton quota over maintaining it?
A) The cotton growers have a competitive edge over foreign cotton growers, and they are
profitable.
B) The fabric manufacturer, a prime contributor to the nation's annual revenue, can earn better
returns by shifting to another country that does not impose cotton quotas.
C) A competing fabric manufacturer is considering opening a production facility in Zanzi.
D) The price of cotton fabric has remain unchanged over the last decade.
Answer: B
Diff: 2: Moderate
12
44) Which of the following best supports maintaining the existing cotton quota?
A) Zanzi cotton growers are protected from cheaper cotton imports.
B) Zanzi cotton growers have an advantage when they export cotton fabric to other countries.
C) The local fabric manufacturer pays high prices for cotton.
D) The local fabric manufacturer uses mostly Zanzi-grown cotton.
Answer: A
Diff: 2: Moderate
45) A revenue tariff aims to protect domestic industries from foreign competition.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
46) A countervailing duty slows the import of products or services and hinders the investment
activities of firms.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
47) FDI and ownership restrictions increase the competitive advantage of foreigners while
diminishing that of the local firms.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
48) Currency controls harm companies that export their products from the host country, but favor
those that rely heavily on imported parts and components.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
13
49) Subsidies may allow a manufacturer to practice dumping-that is, to charge an unusually low
price for exported products.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
50) Dumping violates WTO rules because it amounts to unfair competition.

Answer: TRUE
Diff: 1: Easy
Skill: Concept
51) Import tariffs are a principle instrument of trade intervention. In a short essay, briefly
describe the five main types of import tariffs.
Answer: The most common type of tariff is the import tariff, a tax levied on imported products.
Import tariffs are usually ad valorem. They are assessed as a percentage of the value of the
imported product. In other cases, a government may impose a specific tariff. A specific tariff is a
flat fee or fixed amount per unit of the imported product. It is based on weight, volume or surface
area, such as barrels of oil or square meters of fabric. A revenue tariff is intended to raise money
for the government. A tariff on cigarette imports, for example, produces a steady flow of
revenue. A protective tariff aims to protect domestic industries from foreign competition. A
prohibitive tariff is one so high that no one can import any of the items.
Diff: 2: Moderate
Skill: Synthesis
52) In a short essay, explain why agricultural subsidies have been implemented in Europe and
the United States. What are the criticisms to these subsidies?
Answer: In Europe and the United States, governments frequently provide agricultural subsidies
to supplement the income of farmers and help manage the supply of agricultural commodities.
The U.S. government grants subsidies for more than two dozen commodities, including corn,
soybeans, wheat, cotton, and rice. In Europe, the Common Agricultural Policy (CAP) is a system
of subsidies that represents about 40 percent of the EU's budget, amounting to tens of billions of
euros annually. The CAP and U.S. subsidies have been criticized for promoting unfair
competition and high prices because they tend to prevent developing economies from exporting
their agricultural goods to Europe and the United States. Subsidies encourage overproduction
and therefore lower food prices at home, making agricultural imports from developing countries
less competitive.
Diff: 1: Easy
Skill: Concept
Objective: 7-2, 7-6: Know the instruments of government intervention, Identify the leading
economic blocs
14
53) Explain how quotas work as an instrument of government intervention. What are voluntary
export restraints? How can firms use foreign trade zones as a strategy to manage government
intervention?
Answer: Quotas restrict the physical volume or value of products that firms can import into a
country. In a classic type of quota, the U.S. government imposed an upper limit of roughly 2
million pounds on the total amount of sugar that can be imported into the United States each
year. Sugar imports that exceed this level face a tariff of several cents per pound. The upside is
that U.S. sugar producers are protected from cheaper imports, giving them a competitive edge
over foreign sugar producers. The downside is that U.S. consumers and producers of certain
types of products, such as Hershey's and Coca-Cola, pay more for sugar. It also means
companies that manufacture products containing sugar may save money by moving production to
countries that do not impose quotas or tariffs on sugar.
Governments can impose voluntary quotas, under which firms agree to limit exports of certain
products. These are also known as voluntary export restraints, or VERs. For example, import
quotas in the European Union led to an impasse in which millions of Chinese-made garments
piled up at ports and borders in Europe. The EU impounded the clothing because China had
exceeded the voluntary import quotas it had negotiated with the EU. The action created hardship
for European retailers, who had ordered their clothing stocks several months in advance.
Firms can use foreign trade zones as a strategy to manage government intervention. In an effort
to create jobs and stimulate local economic development, governments establish foreign trade
zones (also known as free trade zones or free ports). A foreign trade zone (FTZ) is an area within
a country that receives imported goods for assembly or other processing and subsequent re-
export. Products brought into an FTZ are not subject to duties, taxes, or quotas until they, or the
products made from them, enter into the non-FTZ commercial territory of the country where the
FTZ is located. Firms use FTZs to assemble foreign dutiable materials and components into
finished products, which are then re-exported. Alternatively, firms may use FTZs to manage
inventory of parts, components, or finished products that the firm will eventually need at some
other location. In the United States, for example, Japanese carmakers store vehicles at the port of
Jacksonville, Florida, without having to pay duties until the cars are shipped to U.S. dealerships.
Diff: 2: Moderate
Skill: Synthesis
Objective: 7-2, 7-6: Know the instruments of government intervention, Identify the leading
economic blocs
54) What is the primary ethical concern regarding the import of products from poor countries?
A) Higher tariffs hurt poor nations more than developed nations.
B) Nations lacking economic freedom cannot afford to export.
C) Emerging nations use government intervention to protect domestic industries.
D) Lack of subsidies adversely affect poor countries.
Answer: A
Diff: 1: Easy
Skill: Concept
Objective: 7-3: Explain the evolution and consequences of government trade intervention
AACSB: Analytical Thinking; Ethical Understanding and Reasoning
15
55) In 1938, the United States passed the Smoot-Hawley Tariff Act, which ________.
A) opened foreign markets for U.S. agricultural products
B) led to the consolidation of the U.S. banking system
C) instituted strict regulations to contain intellectual property theft
D) raised U.S. tariffs to near-record highs of more than 50 percent
Answer: D
Diff: 1: Easy
Skill: Concept
56) Which of the following Asian countries had launched an ambitious program of
industrialization and export-led development that contributed to its rise from poverty in the
1940s to one of the world's wealthiest countries by the 1980s?
A) Indonesia
B) China
C) Japan
D) India
Answer: C
Diff: 1: Easy
Skill: Concept
57) Which of the following was the first major effort to systematically reduce trade barriers
worldwide?
A) WIPO
B) GATT
C) NAFTA
D) WTO
Answer: B
Diff: 1: Easy
Skill: Concept
58) Increasing trade barriers are a major factor in the growth of developing nations and global
commerce.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
16
59) Subsidies can help counterbalance harmful consequences that disproportionately affect the
poor.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
60) Export-led development refers to government policies that impose high tariffs and quotas on
imports from the developed world.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
61) Singapore and South Korea used export-led development to achieve high growth from the
1970s onward.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
62) The WTO was created in order to reduce tariffs through continuous negotiations among
member nations.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
63) The GATT created a forum for resolving trade disputes.

Answer: TRUE
Diff: 1: Easy
Skill: Concept
64) The global recession and financial crisis that began in 2008 arose largely from inadequate
regulation and insufficient enforcement of current regulations in the banking and finance sectors.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
65) In a short essay, explain how the GATT changed international trade.
17
Answer: In 1947, twenty-three nations signed the General Agreements on Tariffs and Trade
(GATT), the first global effort to systematically reduce trade barriers worldwide. The
organization proved extremely effective and resulted in the greatest global decline in trade
barriers in history. The GATT created: (1) a process to reduce tariffs through continuous
negotiations among member nations; (2) an agency to serve as a watchdog over world trade; (3)
a forum for resolving trade disputes.
The GATT introduced the concept of most favored nation (renamed normal trade relations in
1998), according to which each signatory nation agreed to extend the tariff reductions covered in
a trade agreement with a trading partner to all other countries. Thus, a concession to one country
became a concession to all.
Diff: 2: Moderate
Skill: Concept
66) Which of the following entry strategies do most firms use in the absence of high tariffs?
A) FDI
B) licensing
C) joint ventures
D) exporting
Answer: D
Diff: 1: Easy
Skill: Concept
Objective: 7-4: Describe how firms can respond to government trade intervention
67) Which of the following is a method used by some manufacturers to avoid paying high
tariffs?
A) assemble products in the target market
B) produce a large number of less expensive items in the target market
C) employ highly skilled workers in the export location regardless of the cost
D) ship products to fewer international locations
Answer: A
Diff: 1: Easy
Skill: Concept
18
68) Firms use foreign trade zones to ________.
A) consolidate market monopolies
B) assemble foreign dutiable materials and components into finished products, which are then re-
exported
C) create employment opportunities for the local people
D) meet quota demands established by the government
Answer: B
Diff: 1: Easy
Skill: Concept
69) A ________ is an area within a country that receives imported goods for assembly or other
processing and subsequent re-export.
A) single market
B) trade bloc
C) foreign trade zone
D) common market
Answer: C
Diff: 1: Easy
Skill: Concept
Minimizing Trade Barriers (Scenario)

National Appliance Corporation (NAC) needs to build a new manufacturing facility to meet the
increasing demand for professional-grade appliances. NAC managers are considering building
the facility in Mexico but are hesitant because of the high tariffs involved. Another possible
location for the facility is India; however, the country also imposes high tariffs. Wherever NAC
builds a plant, parts will need to be imported from other nations.
70) Which of the following would be most important for NAC managers to consider while taking
a decision in favor of building a facility in Mexico or India?
A) Has NAC engaged in dumping in the past?
B) How would appliance parts and finished products be categorized when passing through
customs?
C) Is employee empowerment culturally favored in Mexico and India?
D) What entry strategies are available in both countries which would allow NAC to minimize
import barriers?
Answer: D
Diff: 2: Moderate
19
71) Given the high trade barriers in Mexico, the management of NAC is most likely to consider
________ to be an inappropriate entry strategy.
A) exporting
B) FDI
C) joint ventures
D) licensing
Answer: A
Diff: 2: Moderate
Skill: Concept
72) Which of the following must NAC ensure in order to reduce exposure to trade barriers?
A) reduced production
B) strong emphasis on quality
C) accurate product classification
D) obtaining patents for inventions
Answer: C
Diff: 2: Moderate
Skill: Concept
73) Tariffs and most nontariff trade barriers apply to FDI, whereas investment barriers apply to
exporting.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
74) If high tariffs are present, managers may consider other strategies, such as FDI, licensing,
and joint ventures that allow the firm to operate directly in the target market, avoiding import
barriers.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
75) Tariffs rarely vary with the form of an imported product.

Answer: FALSE
Diff: 1: Easy
Skill: Concept
20
76) Maquiladoras refer to export-assembly plants in northern Mexico along the U.S. border that
produce components and typically finished products destined for the United States on a tariff-
free basis.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
77) One approach for reducing exposure to trade barriers is to have exported products classified
in the appropriate harmonized product code.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
78) Obtaining economic development incentives from host-or home-country governments

increases the cost of trade and investment barriers.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
79) What is a foreign trade zone (FTZ)? In a short essay, explain how FTZs are utilized by firms.
Answer: A foreign trade zone is an area within countries that receives imported goods for
assembly or other processing and re-export. Products brought into an FTZ are not subject to
duties, taxes, or quotas until they, or the products made from them, enter into the non-FTZ
commercial territory of the country where the FTZ is located. Firms use FTZs to assemble
foreign dutiable materials and components into finished products, which are then re-exported.
Alternatively, firms may use FTZs to manage inventory of parts, components, or finished
products that the firm will need eventually at some other location. Some firms obtain FTZ status
within their own physical facilities. In the United States, for example, Japanese carmakers store
vehicles at the Port of Jacksonville, Florida. The cars remain in the Jacksonville FTZ without
having to pay duties until they are shipped to U.S. dealerships.
Diff: 2: Moderate
Skill: Concept
21
80) A formal arrangement between two or more countries to reduce or eliminate tariffs is known
as a(n) ________.
A) quota arrangement
B) free trade agreement
C) memorandum of association
D) memorandum of understanding
Answer: B
Diff: 1: Easy
Skill: Concept
Objective: 7-5: Understand regional integration and economic blocs
81) Which of the following terms refers to two or more geographically connected nations in
pursuit of free trade relations?
A) grey market
B) trading diaspora
C) economic bloc
D) business strategic unit
Answer: C
Diff: 1: Easy
Skill: Concept
82) Members of ________ agree to adopt common tariffs and non-tariff barriers that are applied
to imports from nonmember countries.
A) free trade areas
B) customs unions
C) the NAFTA
D) the EFTA
Answer: B
Diff: 1: Easy
Skill: Concept
83) The ________ is the simplest and most common level of regional integration.
A) common market
B) political union
C) customs union
D) free trade area
Answer: D
Diff: 1: Easy
Skill: Concept
22
84) Which of the following exemplifies local content requirements?
A) Titania charges a 27 percent tariff on imported dairy products.
B) At least 40 percent of the value of all computers assembled in Titania must be from parts or
other inputs produced in Titania.
C) Titania bans imports of firearms.
D) Titania imposes extensive inspections and bureaucratic procedures on the import of alcoholic
beverages.
Answer: B
Diff: 2: Moderate
Skill: Application
85) NAFTA is an example of which of the following levels of regional integration?

A) free trade area
B) political union
C) economic union
D) common market
Answer: A
Diff: 1: Easy
Skill: Concept
86) Which of the following is an example of a customs union?

A) NAFTA
B) ASEAN
C) MERCOSUR
D) EFTA
Answer: C
Diff: 1: Easy
Skill: Concept
87) The ________ is the level of regional integration that remains an ideal and is yet to be
achieved.
A) free trade area
B) common market
C) political union
D) customs union
Answer: C
Diff: 1: Easy
Skill: Concept
23
88) NAFTA is a treaty entered into by Canada, Mexico, and the United States.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
89) MERCOSUR, an economic bloc in Latin America, is an example of an economic union.

Answer: FALSE
Diff: 1: Easy
Skill: Concept
90) The level of integration of free trade areas is greater than that of customs unions.
Answer: FALSE
Diff: 1: Easy
Skill: Concept
24
91) Briefly describe the five levels of economic integration.
Answer: There are five possible levels of regional integration. We can think of these levels as a
continuum, with economic interconnectedness progressing from a low level of integration-the
free trade area-through higher levels to the most advanced form of integration-the political union.
The political union represents the ultimate degree of integration among countries, which no
countries have yet achieved. The free trade area is the simplest and most common arrangement,
in which member countries agree to gradually eliminate formal barriers to trade in products and
services within the bloc. Each member country maintains an independent international trade
policy with countries outside the bloc. The second level of regional integration is the customs
union. It is similar to a free trade area except that member states harmonize their external trade
policies and adopt common tariff and nontariff barriers on imports from nonmember countries.
In the third stage of regional integration, member countries establish a common market (also
known as a single market), in which trade barriers are reduced or removed, common external
barriers are established, and products, services, and factors of production such as capital, labor,
and technology are allowed to move freely among the member countries. Like a customs union,
a common market also establishes a common trade policy with nonmember countries. An
economic union is the fourth stage of regional integration, in which member countries enjoy all
the advantages of early stages but also strive to have common fiscal and monetary policies. At
the extreme, each member country adopts identical tax rates. The bloc aims for standardized
monetary policy, which requires establishing fixed exchange rates and free convertibility of
currencies among the member states, in addition to allowing the free movement of capital. This
standardization helps eliminate discriminatory practices that might favor one member state over
another. Through greater mobility of products, services, and production factors, an economic
union enables firms within the bloc to locate productive activities in member states with the most
favorable economic policies.
Diff: 3: Hard
Skill: Synthesis
92) Which of the following economic blocs includes Switzerland as a member country?
A) EU
B) EFTA
C) CAN
D) APEC
Answer: B
Diff: 1: Easy
Skill: Concept
Objective: 7-6: Identify the leading economic blocs
25
93) Which of the following is responsible for determining the admission of new member
countries to the EU?
A) the Council of the European Union
B) the European Parliament
C) the European Court of Justice
D) the European Commission
Answer: A
Diff: 1: Easy
Skill: Concept
94) Members of ________ benefitted the most from the maquiladora program.
A) NAFTA
B) EFTA
C) EU
D) MERCOSUR
Answer: A
Diff: 1: Easy
Skill: Concept
95) Which of the following has occurred as a result of NAFTA?

A) workers at maquiladoras have instigated union strikes
B) Mexico's per-capita income has risen substantially
C) Canadian exports to Europe and Asia have doubled
D) foreign investors have been replaced by U.S. firms
Answer: B
Diff: 2: Moderate
Skill: Concept
96) Harmonization of standards is one of the steps taken by the EU to become an economic
union.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
26
97) What has NAFTA accomplished for its members?
Answer: Launched in 1994, NAFTA consists of Canada, Mexico, and the United States. It is the
most significant economic bloc in the Americas and comparable to the EU in size. Initially, the
accord increased market access between Canada, Mexico, and the United States. It eliminated
tariffs and most nontariff barriers for products and services traded in the bloc and made it
possible for member-country firms to bid for government contracts in all three countries.
NAFTA also established trade rules and uniform customs procedures and regulations. The
members agreed to rules for investment and intellectual property rights. NAFTA also provides
for dispute settlement in such areas as investment, unfair pricing, labor issues, and the
environment. Since the bloc's inception, Canada and Mexico have become the most important
export markets of the United States, accounting for about one-third of U.S. exports. In the three-
year period through 2012, the largest increase in U.S. export growth stemmed from exports to
Canada and Mexico. In the 1980s, Mexico's tariffs averaged 100 percent and gradually decreased
over time, eventually disappearing under NAFTA. Annual NAFTA foreign investment in
Mexico rose dramatically as U.S. and Canadian firms invested in their southern neighbor.
Following NAFTA's passage, Mexico's per-capita income has risen substantially. Mexico is now
Latin America's wealthiest country in per-capita income terms.
Diff: 2: Moderate
Skill: Synthesis
98) Nations pursuing regional integration seek to ________.

A) increase the scale of the marketplace for firms inside the economic bloc
B) help firms increase the scale of operations and enhanced productivity
C) attract direct investment from outside the bloc
D) all of the above
Answer: D
Diff: 1: Easy
Skill: Concept
Objective: 7-7: Understand the advantages and implications of regional integration
99) Which of the following is the most likely reason for the establishment of the European
Community?
A) broaden the power of communism within East Germany
B) create strict tariffs for trade and international business
C) combine forces against the powerful former Soviet Union
D) establish judicial procedures to handle trade violators
Answer: C
Diff: 2: Moderate
Skill: Concept
27
100) Regional integration greatly increases the scale of the marketplace for firms inside the
economic bloc.
Answer: TRUE
Diff: 1: Easy
Skill: Concept
101) Describe four advantages of regional integration. Provide an example to illustrate each
point.
Answer:
a. Expand market size-Regional integration greatly increases the scale of the marketplace for
firms inside the economic bloc. For example, while Belgium has a population of just 10 million,
the absence of trade barriers with other countries in the EU gives Belgian firms easier access to a
total market of roughly 500 million buyers.
b. Achieve scale economies and enhanced productivity-Expansion of market size within an
economic bloc gives member country firms the opportunity to increase the scale of operations in
both production and marketing. This leads to greater concentration and increased efficiency in
these activities. For instance, where a German firm may be only moderately efficient when
producing 10,000 units of a good strictly for the German market, it greatly increases its
efficiency by producing 50,000 units for the much larger EU market.
c. Attract direct investment from outside the bloc-Compared to investing in stand-alone
countries, foreign firms prefer to invest in countries that are part of an economic bloc because
factories that they build within the bloc receive preferential treatment for exports to other
member countries. For example, many non-European firms-including General Mills, Samsung,
and Tata-have invested heavily in the EU to take advantage of Europe's economic integration. By
establishing operations in a single EU country, these firms gain free-trade access to the entire EU
market.
d. Acquire stronger defensive and political posture-Economic blocs allow countries to obtain
greater bargaining power and political power in world affairs. For example, the EU enjoys
greater influence with the World Trade Organization in trade negotiations than any individual
member country. Broadly speaking, countries are more powerful when than cooperate together
than when they operate as individual entities.
Diff: 2: Moderate
Skill: Concept
28

Chapter 7 Government Intervention and Regional Economic Integration

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 7 Government Intervention and Regional Economic Integration

Uploaded by

Copyright:

Available Formats

International Business: The New Realities, 4e (Cavusgil)

Chapter 7 Government Intervention and Regional Economic Integration

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

5) Which of the following refers to an often-used form of nontariff trade barrier?

6) A quantitative restriction on specific imports for a set period of time is referred to as

8) Protectionist policies may also lead to ________.

9) Governments impose offensive barriers to ________.

10) Governments impose defensive barriers to ________.

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

27) Typically, administrative and bureaucratic procedures ________.

31) Tariffs that are ad valorem are ________.

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

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

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

Cotton Quota (Scenario)

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

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

Minimizing Trade Barriers (Scenario)

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

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

85) NAFTA is an example of which of the following levels of regional integration?

86) Which of the following is an example of a customs union?

89) MERCOSUR, an economic bloc in Latin America, is an example of an economic union.

95) Which of the following has occurred as a result of NAFTA?

98) Nations pursuing regional integration seek to ________.

You might also like