CHAPTER FIVE

Regionalism and Multilateralism

True/False

1. Both Great Britain and Chile have considered for inclusion to the North American Free Trade Agreement.Ans: TrueDif: E

2. As of 2002 there were more than 130 bilateral or regional trade agreements in effect around the world.Ans: TrueDif: E

3. A free trade area is a trading arrangement in which a nation grants partial trade preferences to one or more trading partners.Ans: FalseDif: E

4. A preferential trade arrangement is a trade agreement that removes all barriers to trade among participating nations.Ans: FalseDif: E

5. The growth of trading agreements among geographically close groups of nations is termed multilateralism.Ans: FalseDif: M

6. Industrialized countries account for about three-fourths of total international trade.Ans: FalseDif: M

7. Together, the United States and the European Union account for more than half of international trade flows.Ans: TrueDif: E

8. A nation’s share of global trade is calculated as the sum of exports and imports in a given time period divided by total global trade.Ans: TrueDif: E

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9. Preferential trade arrangements and free trade areas are the weakest form of trade arrangements.Ans: TrueDif: M

10. The European Free Trade Association is an example of customs union.Ans: FalseDif: M

11. NAFTA resulted in more significant changes in trade patterns in Mexico and Canada than in the U.S.Ans: TrueDif: M

12. The Treaty of Rome was signed in 1967 by Belgium, France, Italy, West Germany, Luxembourg and the Netherlands.Ans: FalseDif: M

13. The Treaty of Rome established a customs union among the member countries.Ans: TrueDif: E

14. Mercosur is a common market, but not yet a customs union.Ans: TrueDif: M

15. Trade agreements normally result in both trade creation and trade diversion.Ans: TrueDif: E

16. According to a study by Andrew Rose, sharing a common currency with other countries generates more trade on average than entering into a regional trade agreement.Ans: TrueDif: M

17. Trade diversion is the movement of goods or components of goods fro a country outside a trading arrangement to one within such an arrangement so that the seller can benefit from trading preferences within the arrangement.Ans: FalseDif: M

18. Rules of origin requirements are designed to limit trade diversion.Ans: FalseDif: M

19. Tariffs on imports into EU nations average about 5%, although the effects of these tariffs are probably greater than the number suggests.Ans: TrueDif: M

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20. The average cost of tariffs in the EU is about $215,000 per job protected.Ans: TrueDif: M

21. Trade deflections are likely to be bad if they encourage domestically located production of goods and services in which a country has a comparative disadvantage.Ans: TrueDif: D

22. The WTO was established by the Uruguay Round of GATT in 1993.Ans: TrueDif: M

23. Most nations apply tariffs to goods and quotas to services.Ans: TrueDif: D

24. The WTO defines a least-developed nation as one that has a per capital income of under $1,000 per year.Ans: TrueDif: M

25. Implementation of Section 201 of the Trade Act of 1974 is no longer permissible under WTO rules.Ans: FalseDif: M

Multiple Choice

1. A trading arrangement that eliminates most or all barriers to trade among participating nations and utilizes common barriers to trade with other countries outside the group is called a A) preferential trade agreement.B) free trade area.C) customs union.D) common market.E) economic union.Ans: CDif: E

2. In a __________ countries breakdown trade barriers among participating nations, use common barriers to trade with nonmember countries and allow free movement of factors of production between member countries.A) preferential trade agreementB) free trade areaC) customs unionD) common marketE) economic unionAns: DDif: E

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3. An economic union

I. is one step beyond a common market.II. requires a common currency.III. entails close coordination of economic policies among member countries.IV. requires political union to be feasible.

A) I and II onlyB) II and III onlyC) I and III onlyD) III and IV onlyE) I, II, III and IVAns: CDif: M

4. Economic union entails

I. free trade among member countries.II. common barriers to trade for non-member countries.III. free movement of factors of production between member countries.

A) I onlyB) II onlyC) I and II onlyD) I and III onlyE) I, II and IIIAns: EDif: M

5. A country has imports of $50 million and exports of $75 million at a time when global trade is $900 million. The country’s share of global trade is A) 5.56%.B) 8.33%.C) 13.89%.D) 2.78%.E) 27.89%.Ans: CDif: E

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6. Rank the following regional trade blocks from highest to lowest according to their share of global trade in 2001.

I. ASEANII. MercosurIII. NAFTAIV. European Union

Highest –> LowestA) III, IV, I, IIB) IV, III, I, IIC) IV, III, II, ID) III, IV, II, IE) I, III, IV, IIAns: BDif: D

7. In order to measure how a regional trade arrangement affects the intensity of trade patterns in a region one should examineA) global trade shares of regional trade blocs.B) only the trade shares of the largest country in the regional block.C) only the trade shares of the smallest country in the regional block.D) trade shares of the regional bloc measured relative to the trade shares of other regional blocs.E) none of the aboveAns: EDif: D

8. If one adjusts for the size of NAFTA’s share of world trade as compared to the trade share of ASEAN and the European Union one finds that A) ASEAN countries trade more intensively among its members than NAFTA countries.B) NAFTA countries trade more intensively among its members than ASEAN countries.C) NAFTA trades more intensively among its members than European Union countries.D) ASEAN trades more intensively among its member than European Union countries.E) none of the above holdsAns: ADif: D

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NARRBEGIN: Table 1, Trade Patterns

Country of origin:

AmountExported: Exported to:

Country 1 $45 Country 2Country 1 $55 Country 3Country 2 $35 Country 1Country 2 $25 Country 3Country 3 $45 Country 1Country 3 $15 Country 2

These are the only three countries in the world.

NARREND

9. Refer to Table 1 to answer the following question: According to the information given, Country 1 has a __________ and Country 2 has a __________.A) trade surplus; trade deficitB) trade deficit; trade deficitC) trade surplus, trade surplusD) trade surplus; zero net trade balanceE) trade deficit; zero net trade balanceAns: DNAR: Table 1 Trade PatternsDif: D

10. Refer to Table 1 to answer the following question: According to the information given, Country 1’s share of global trade isA) 40.91%.B) 22.73%.C) 18.18%.D) 45.45%.E) 36.36%.Ans: ANAR: Table 1 Trade PatternsDif: D

11. Refer to Table 1 to answer the following question: According to the information given, Country 3’s share of global trade is A) 18.18%.B) 31.82%.C) 13.64%.D) 27.27%.E) 36.36%.Ans: BNAR: Table 1 Trade PatternsDif: D

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12. Refer to Table 1 to answer the following question: Suppose that Country 1 and Country 2 together constitute a regional trade bloc known as the United Trade Area. What is the trade concentration ratio of this trade bloc?A) 0.7822B) 0.6818C) 0.5999D) 0.5333E) 0.2917Ans: ANAR: Table 1 Trade PatternsDif: D

13. Refer to Table 1 to answer the following question: Suppose that Country 2 and Country 3 together constitute a regional trade bloc known as the Free Trade Area. What is the trade concentration ratio of this trade bloc?A) 0.5909B) 0.3077C) 0.2955D) 0.5207E) 0.3333Ans: DNAR: Table 1 Trade PatternsDif: D

14. Refer to Table 1 to answer the following question: According to the gravity equations as applied to international trade, __________ is likely to be the farthest away from __________.A) Country 1; Country 2B) Country 1; Country 3C) Country 2; Country 3Ans: CNAR: Table 1 Trade PatternsDif: M

15. Suppose that over time the concentration ratio for NAFTA increased. This implies that

I. global trade has increased.II. trade among NAFTA nations has increased relative to NAFTA’s total global trade.III. NAFTA’s share of global trade has fallen.

A) I onlyB) II onlyC) I and III onlyD) II and III onlyE) I, II and IIIAns: BDif: M

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16. Rank the following regional trade blocks from highest to lowest according to their concentration ratios.

I. Andean CommunityII. MercosurIII. NAFTAIV. European Union

Highest –> LowestA) IV, I, II, IIIB) III, IV, II, IC) II, I, III, IVD) IV, III, I, IIE) I, II, IV, IIIAns: EDif: D

17. As of 2002 the Andean Community was aA) free trade area.B) common market.C) customs union.D) economic union.E) none of the aboveAns: CDif: M

18. As a result of the formation of NAFTA,A) U.S. imports from Mexico increased.B) U.S. exports to Mexico increased.C) Canadian shares of U.S. trade remained approximately the same.D) Mexican exports to Canada increased.E) all of the aboveAns: EDif: M

19. Which one of the following countries did not originally sign the Treaty of Rome?A) BelgiumB) FranceC) ItalyD) LuxembourgE) Great BritainAns: EDif: M

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20. Mercosur is a A) free trade area.B) common market.C) customs union.D) economic union.E) none of the aboveAns: BDif: M

21. A shift in international trade caused by one nation giving trade preferences to another is calledA) trade creation.B) trade diversion.C) trade deflection.D) a participating trade agreement.E) a net trade effect.Ans: BDif: M

22. According to the gravity equations of international trade, the amount of international trade between two countries varies __________ with the size of countries and __________ with the distance between countries.A) directly; indirectlyB) indirectly; directlyC) directly; directlyD) indirectly; indirectlyE) indeterminately; indirectlyAns: ADif: E

23. According to a study by Andrew Rose, having the same currency encourages countries to trade _____ times as much as countries with different currencies.A) 2B) 3C) 4D) 5E) 6Ans: BDif: M

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24. Having the same currency in two countries tends to stimulate trade because adopting a common currency

I. solidifies the governments’ commitment to greater integration between the two countries that share a currency.

II. promotes greater integration of the country’s financial markets.III. eliminates relative price changes in the two countries.

A) I onlyB) II onlyC) I and II onlyD) II and III onlyE) I, II and IIIAns: CDif: M

25. The establishment of regional trading blocs may lead to a decline in global trade if

I. sufficient trade diversion occurs.II. governments increase tariffs to nonmember nations to offset lost tariff revenues from

countries participating in regional blocs.III. countries protect industries in which they do not have a comparative advantage.

A) I onlyB) II onlyC) II and III onlyD) I and II onlyE) I, II and IIIAns: EDif: M

26. Some economists believe that regional trading blocs are more likely to result in global trade increases if A) only part of the trade barriers are removed within participating countries.B) the regional groups maintain high barriers to trade for countries outside the group.C) the bloc keeps membership of the group open to as many countries as possible.D) A) and C) are trueE) B) and D) are trueAns: DDif: M

27. Regulations governing conditions under which products are eligible for trading preferences under trade agreements are calledA) tariffs.B) quotas.C) countervailing duties.D) anti-dumping measures.E) rules of origin requirements.Ans: EDif: E

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28. Free trade advocates generally favor __________ to other forms of trade rules.A) customs unionsB) common marketsC) economic unionsD) multilateralismE) protectionismAns: DDif: E

29. A Japanese auto manufacturer locates an assembly plant in Brazil to gain Mercosur trade preferences on sales of the completed product in Argentina, even though the Brazilian plant operates at higher cost than the Japanese assembly plant. This is an example ofA) trade creation.B) trade diversion.C) trade deflection.D) rules of origin.E) declines in trade resulting from regionalism.Ans: CDif: M

30. If Country 1 is granted most favored nation (MFN) status by Country 2 thenA) Country 1 will have free trade with Country 2.B) Country 1 will have a customs union with Country 2.C) Country 1 will automatically be granted any reductions in trade barriers that are given to all

countries with MFN status.D) global trade will necessarily increase.E) Country 2 will enjoy an increase in tariff revenue from exports by Country 1.Ans: CDif: M

31. An international agreement among major nations of the world governing cross border trade in goods isA) GATT.B) GATS.C) WTO.D) ITC.E) IMF.Ans: ADif: E

32. The GATT has been signed by more than ______ nations.A) 50B) 75C) 100D) 130E) 140Ans: EDif: M

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33. An international agreement among major nations of the world governing cross border trade in services isA) GATT.B) GATS.C) WTO.D) ITC.E) IMF.Ans: BDif: E

34. The multinational organization that oversees multilateral trade negotiations and rules on trade disputes is A) GATT.B) GATS.C) WTO.D) ITC.E) IMF.Ans: CDif: E

35. In creating regional trade blocs, trade creation is usually __________ than trade diversion leading to __________ global trade.A) less than; reducedB) less than; increasedC) greater than; increasedD) greater than; reducedE) equal to; no change inAns: CDif: E