Regionalism and Multilateralism 225
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: True
Dif: E
2. As of 2002 there were more than 130 bilateral or regional trade agreements in effect around the world.
Ans: True
Dif: 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: False
Dif: E
4. A preferential trade arrangement is a trade agreement that removes all barriers to trade among participating nations.
Ans: False
Dif: E
5. The growth of trading agreements among geographically close groups of nations is termed multilateralism.
Ans: False
Dif: M
6. Industrialized countries account for about three-fourths of total international trade.
Ans: False
Dif: M
7. Together, the United States and the European Union account for more than half of international trade flows.
Ans: True
Dif: 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: True
Dif: E
9. Preferential trade arrangements and free trade areas are the weakest form of trade arrangements.
Ans: True
Dif: M
10. The European Free Trade Association is an example of customs union.
Ans: False
Dif: M
11. NAFTA resulted in more significant changes in trade patterns in Mexico and Canada than in the U.S.
Ans: True
Dif: M
12. The Treaty of Rome was signed in 1967 by Belgium, France, Italy, West Germany, Luxembourg and the Netherlands.
Ans: False
Dif: M
13. The Treaty of Rome established a customs union among the member countries.
Ans: True
Dif: E
14. Mercosur is a common market, but not yet a customs union.
Ans: True
Dif: M
15. Trade agreements normally result in both trade creation and trade diversion.
Ans: True
Dif: 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: True
Dif: 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: False
Dif: M
18. Rules of origin requirements are designed to limit trade diversion.
Ans: False
Dif: 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: True
Dif: M
20. The average cost of tariffs in the EU is about $215,000 per job protected.
Ans: True
Dif: 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: True
Dif: D
22. The WTO was established by the Uruguay Round of GATT in 1993.
Ans: True
Dif: M
23. Most nations apply tariffs to goods and quotas to services.
Ans: True
Dif: D
24. The WTO defines a least-developed nation as one that has a per capital income of under $1,000 per year.
Ans: True
Dif: M
25. Implementation of Section 201 of the Trade Act of 1974 is no longer permissible under WTO rules.
Ans: False
Dif: 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: C
Dif: 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 agreement
B) free trade area
C) customs union
D) common market
E) economic union
Ans: D
Dif: E
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 only
B) II and III only
C) I and III only
D) III and IV only
E) I, II, III and IV
Ans: C
Dif: 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 only
B) II only
C) I and II only
D) I and III only
E) I, II and III
Ans: E
Dif: 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: C
Dif: E
6. Rank the following regional trade blocks from highest to lowest according to their share of global trade in 2001.
I. ASEAN
II. Mercosur
III. NAFTA
IV. European Union
Highest –> Lowest
A) III, IV, I, II
B) IV, III, I, II
C) IV, III, II, I
D) III, IV, II, I
E) I, III, IV, II
Ans: B
Dif: D
7. In order to measure how a regional trade arrangement affects the intensity of trade patterns in a region one should examine
A) 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 above
Ans: E
Dif: 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 holds
Ans: A
Dif: D
NARRBEGIN: Table 1, Trade Patterns
Exported: / Exported to:
Country 1 / $45 / Country 2
Country 1 / $55 / Country 3
Country 2 / $35 / Country 1
Country 2 / $25 / Country 3
Country 3 / $45 / Country 1
Country 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 deficit
B) trade deficit; trade deficit
C) trade surplus, trade surplus
D) trade surplus; zero net trade balance
E) trade deficit; zero net trade balance
Ans: D
NAR: Table 1 Trade Patterns
Dif: D
10. Refer to Table 1 to answer the following question: According to the information given, Country 1’s share of global trade is
A) 40.91%.
B) 22.73%.
C) 18.18%.
D) 45.45%.
E) 36.36%.
Ans: A
NAR: Table 1 Trade Patterns
Dif: 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: B
NAR: Table 1 Trade Patterns
Dif: D
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) 0.7822
B) 0.6818
C) 0.5999
D) 0.5333
E) 0.2917
Ans: A
NAR: Table 1 Trade Patterns
Dif: 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) 0.5909
B) 0.3077
C) 0.2955
D) 0.5207
E) 0.3333
Ans: D
NAR: Table 1 Trade Patterns
Dif: 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 2
B) Country 1; Country 3
C) Country 2; Country 3
Ans: C
NAR: Table 1 Trade Patterns
Dif: 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 only
B) II only
C) I and III only
D) II and III only
E) I, II and III
Ans: B
Dif: M
16. Rank the following regional trade blocks from highest to lowest according to their concentration ratios.
I. Andean Community
II. Mercosur
III. NAFTA
IV. European Union
Highest –> Lowest
A) IV, I, II, III
B) III, IV, II, I
C) II, I, III, IV
D) IV, III, I, II
E) I, II, IV, III
Ans: E
Dif: D
17. As of 2002 the Andean Community was a
A) free trade area.
B) common market.
C) customs union.
D) economic union.
E) none of the above
Ans: C
Dif: 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 above
Ans: E
Dif: M
19. Which one of the following countries did not originally sign the Treaty of Rome?
A) Belgium
B) France
C) Italy
D) Luxembourg
E) Great Britain
Ans: E
Dif: M
20. Mercosur is a
A) free trade area.
B) common market.
C) customs union.
D) economic union.
E) none of the above
Ans: B
Dif: M
21. A shift in international trade caused by one nation giving trade preferences to another is called
A) trade creation.
B) trade diversion.
C) trade deflection.
D) a participating trade agreement.
E) a net trade effect.
Ans: B
Dif: 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; indirectly
B) indirectly; directly
C) directly; directly
D) indirectly; indirectly
E) indeterminately; indirectly
Ans: A
Dif: 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) 2
B) 3
C) 4
D) 5
E) 6
Ans: B
Dif: M
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 only
B) II only
C) I and II only
D) II and III only
E) I, II and III
Ans: C
Dif: 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 only
B) II only
C) II and III only
D) I and II only
E) I, II and III
Ans: E
Dif: 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 true
E) B) and D) are true
Ans: D
Dif: M
27. Regulations governing conditions under which products are eligible for trading preferences under trade agreements are called
A) tariffs.
B) quotas.
C) countervailing duties.
D) anti-dumping measures.
E) rules of origin requirements.
Ans: E
Dif: E
28. Free trade advocates generally favor ______to other forms of trade rules.
A) customs unions
B) common markets
C) economic unions
D) multilateralism
E) protectionism
Ans: D
Dif: 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 of
A) trade creation.
B) trade diversion.
C) trade deflection.
D) rules of origin.
E) declines in trade resulting from regionalism.
Ans: C
Dif: M
30. If Country 1 is granted most favored nation (MFN) status by Country 2 then
A) 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: C
Dif: M
31. An international agreement among major nations of the world governing cross border trade in goods is
A) GATT.
B) GATS.
C) WTO.
D) ITC.
E) IMF.
Ans: A
Dif: E
32. The GATT has been signed by more than ______nations.
A) 50
B) 75
C) 100
D) 130
E) 140
Ans: E
Dif: M
33. An international agreement among major nations of the world governing cross border trade in services is
A) GATT.
B) GATS.
C) WTO.
D) ITC.
E) IMF.
Ans: B
Dif: 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: C
Dif: E
35. In creating regional trade blocs, trade creation is usually ______than trade diversion leading to ______global trade.
A) less than; reduced
B) less than; increased
C) greater than; increased
D) greater than; reduced
E) equal to; no change in
Ans: C
Dif: E