Global Business 2nd Edition by Mike Peng – Test Bank

Global Business 2nd Edition by Mike Peng – Test Bank

Chapter 8—

Capitalizing on Global and Regional Integration

TRUE/FALSE

1. Regional economic integration refers to efforts to reduce trade and investment barriers within the globe. ANS: F PTS: 1 DIF: Moderate REF: p. 238 OBJ: 8.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence 2. There are three types of economic integration, namely: global, regional, and local. ANS: F PTS: 1 DIF: Easy REF: p. 238 OBJ: 8.1 NAT: AACSB: Tier 1 Communication; Tier 2 Environmental Influence 3. The formation of European Union shows the effort to reduce trade and investment barriers in Europe. ANS: T PTS: 1 DIF: Moderate REF: p. 238 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 4. The World Trade Organization was created after World War II as a multilateral trading system. ANS: F PTS: 1 DIF: Difficult REF: p. 239 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 5. General Agreement on Tariffs and Trade (GATT) expanded considerably into WTO. ANS: T PTS: 1 DIF: Moderate REF: p. 239 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 6. Global economic integration does not have political benefits. ANS: F PTS: 1 DIF: Moderate REF: p. 240 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 7. The multilateral trading system resolves disputes between two countries involved in global trade. ANS: F PTS: 1 DIF: Moderate REF: p. 241 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 8. The crucial principle of GATT/WTO is nondiscrimination, ensuring that countries do not discriminate among its trading partners. ANS: T PTS: 1 DIF: Easy REF: p. 241 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 9. Upon establishment of GATT, there were many loopholes in the Multifibre Arrangement (MFA), designed to limit free trade in textiles. ANS: T PTS: 1 DIF: Moderate REF: p. 242 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 10. Unlike tariffs, whose existence is easily observed, many governments imposed NTFs (nontariff barriers) to protect their domestic market. ANS: T PTS: 1 DIF: Easy REF: p. 242 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 11. WTO has six main areas including trade of goods, services, intellectual property, and banning governments from protecting their agricultural industry. ANS: F PTS: 1 DIF: Easy REF: p. 242 OBJ: 8.2 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 12. The negotiations sponsored by WTO in Doha, Qatar, were aimed directly at the economic development of developing countries. ANS: T PTS: 1 DIF: Easy REF: p. 245 OBJ: 8.2 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Creation of Value 13. The “stumbling block” of the Doha round turned out to be intellectual property. ANS: F PTS: 1 DIF: Easy REF: p. 245 OBJ: 8.2 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence 14. NAFTA is an example of the common market. ANS: F PTS: 1 DIF: Moderate REF: p. 248 OBJ: 8.3 NAT: AACSB: Tier 1 Communication; Tier 2 Environmental Influence 15. NAFTA is an example of a free trade area. ANS: T PTS: 1 DIF: Moderate REF: p. 248 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 16. EU is an example of a free trade area. ANS: F PTS: 1 DIF: Moderate REF: p. 248 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 17. All EU members adopt the euro. ANS: F PTS: 1 DIF: Moderate REF: p. 249 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 18. Members of an economic union coordinate and harmonize economic policies. ANS: T PTS: 1 DIF: Moderate REF: p. 249 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 19. Former Soviet Union is an example of a political union. ANS: T PTS: 1 DIF: Moderate REF: p. 249 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 20. EU has been established as an economic union since the Maastricht Treaty went into affect in 1993. ANS: T PTS: 1 DIF: Moderate REF: p. 250 OBJ: 8.3 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Legal Responsibilities 21. EU can be best described as the United States of Europe. ANS: F PTS: 1 DIF: Moderate REF: p. 250 OBJ: 8.3 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 22. Schengen is a passport-free travel zone within the EU ANS: T PTS: 1 DIF: Moderate REF: p. 250 OBJ: 8.3 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 23. Denmark and United Kingdom do not use the euro as their currency. ANS: T PTS: 1 DIF: Moderate REF: p. 248 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 24. Free trade area permits the free movement of goods and people. ANS: F PTS: 1 DIF: Moderate REF: p. 248 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 25. Monetary union is a group of countries that use a common currency. ANS: T PTS: 1 DIF: Moderate REF: p. 249 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 26. Adopting euro limits the flexibility in fiscal policy. ANS: T PTS: 1 DIF: Moderate REF: p. 252 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 27. All EU countries opened their labor markets to citizens from other member countries. ANS: F PTS: 1 DIF: Moderate REF: p. 255 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 28. NAFTA is the same economic integration as EU. ANS: F PTS: 1 DIF: Moderate REF: p. 256 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 29. NAFTA, a free trade agreement between Canada, Mexico, and the United States, secured Mexico a preferential treatment for 80% of its exports. ANS: T PTS: 1 DIF: Easy REF: p. 256 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 30. Mercosur is relatively more protectionist and suspicious of the US, whereas the Andean Community is more pro-free trade. ANS: T PTS: 1 DIF: Easy REF: p. 258 OBJ: 8.4 NAT: AACSB: Tier 1 Communication; Tier 2 Environmental Influence 31. Latin American countries launched negotiations with Canada and the US for a possible Free Trade Area of the Americas. ANS: T PTS: 1 DIF: Moderate REF: p. 258 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 32. The ANZCERTA or CER, launched in 1983, turned historical rivalry between Australia and New Zealand into a partnership. ANS: T PTS: 1 DIF: Easy REF: p. 258 OBJ: 8.4 NAT: AACSB: Tier 1 Communication; Tier 2 Environmental Influence 33. Ever since the establishment of the ASEAN, in 1992, intra-ASEAN trade has grown by 12% annually. ANS: T PTS: 1 DIF: Difficult REF: p. 259 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 34. In 1998 ASEAN and CER countries formed yet another regional entity, the APEC. ANS: T PTS: 1 DIF: Moderate REF: p. 259 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 35. Regional economic integration in Africa is strong and effective. ANS: F PTS: 1 DIF: Easy REF: p. 260 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence MULTIPLE CHOICE 1. Efforts to reduce trade and investment barriers within one region refer to: a. Global Economic Integration b. Local Economic Integration c. Regional Economic Integration d. Both Local and Regional Integration ANS: C PTS: 1 DIF: Easy REF: p. 238 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 2. Out of the following, which one is an example of regional economic integration? a. European Union b. British Commonwealth c. Cingular and AT&T merger d. Coca-Cola international operations ANS: A PTS: 1 DIF: Moderate REF: p. 238 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 3. Which of the following institutions was established following World War II to regulate the trade between countries? a. WTO, World Trade Organization b. GATT, General Agreement on Tariffs and Trade c. UN, United Nations d. EU, European Union ANS: B PTS: 1 DIF: Moderate REF: p. 239 OBJ: 8.1 NAT: AACSB: Tier 1 Communication; Tier 2 Environmental Influence 4. Which of the following is an economic benefit of global economic integration? a. Disputes are handled constructively. b. Rules make life easier and discrimination impossible for all participating countries. c. Free trade and investment raise incomes and stimulate economic growth. d. All of these answers ANS: D PTS: 1 DIF: Difficult REF: p. 240 OBJ: 8.1 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence 5. Countries benefit from global economic integration politically and economically. Which of the following is an example of a political benefit? a. Promoting peace by promoting trade and investment b. Building confidence in a multilateral trading system c. Stimulating economic growth and raising income d. Promoting peace and building confidence ANS: D PTS: 1 DIF: Easy REF: p. 240 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 6. A crucial principle in the multilateral trading system is: a. Nondiscrimination b. Low tariff c. No trade barrier d. Reciprocation ANS: A PTS: 1 DIF: Easy REF: p. 241 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 7. The most (in)famous loophole in merchandise trade created through GATT was: a. TRIPS b. NTB c. MFA d. MBA ANS: C PTS: 1 DIF: Moderate REF: p. 242 OBJ: 8.2 NAT: AACSB: Tier 1 Analytic; Tier 2 Legal Responsibilities 8. Which one of the following is NOT a NTB (nontariff barrier)? a. Subsidies b. Local content requirements c. Customs d. The WTO ANS: C PTS: 1 DIF: Moderate REF: p. 242 OBJ: 8.2 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Legal Responsibilities and Environmental Influence 9. Which one of the following is NOT a function of WTO? a. Regulation of subsidies on agricultural products b. Dispute settlement c. Trade policy reviews d. Regulation of trade of goods, services, and intellectual property ANS: A PTS: 1 DIF: Easy REF: p. 242 OBJ: 8.2 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence 10. Which of the following is an agreement regulating intellectual property? a. GATT b. GATS c. IPA d. TRIPS ANS: D PTS: 1 DIF: Moderate REF: p. 242 OBJ: 8.2 NAT: AACSB: Tier 1 Analytic; Tier 2 Legal Responsibilities 11. Which one of the following was NOT part of the agenda of the Doha round? a. Reducing agricultural subsidies in developing countries b. Slashing tariffs in the industries that developing countries might benefit from c. Freeing up trade in services d. Strengthening intellectual property protection ANS: A PTS: 1 DIF: Moderate REF: p. 245 OBJ: 8.2 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 12. Which of the following is NOT a benefit of regional economic integration? a. Promoting peace by fostering closer economic ties b. Setting consistent rules to make discriminatory regulations impossible c. Allowing free trade to raise incomes and create new jobs d. Increasing sovereignty of integrated countries ANS: D PTS: 1 DIF: Difficult REF: p. 247 OBJ: 8.3 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 13. NAFTA is an example of: a. Free trade area b. Customs union c. Common market d. Economic union ANS: A PTS: 1 DIF: Easy REF: p. 248 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 14. Former soviet union is an example of: a. Free trade area b. Customs union c. Common market d. Political union ANS: D PTS: 1 DIF: Easy REF: p. 248 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 15. ____ is accomplished by 16 EU members through the adoption of the euro. a. Free trade area b. Customs union c. Common market d. Monetary union ANS: D PTS: 1 DIF: Easy REF: p. 248 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 16. Today’s EU is a(an): a. Free trade area b. Customs union c. Common market d. Economic union ANS: D PTS: 1 DIF: Easy REF: p. 248 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 17. A ____ permits the free movement of goods and people. a. Free trade area b. Customs union c. Common market d. Monetary union ANS: C PTS: 1 DIF: Easy REF: p. 248 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 18. Which of the following is an example of a custom union? a. Benelux (Belgium, Netherlands, Luxembourg) b. EU (European Union) c. RC (Russian Confederation) d. Eastern Europe (Romania, Bulgaria) ANS: A PTS: 1 DIF: Easy REF: p. 249 OBJ: 8.3 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 19. In the ____ union, members coordinate and harmonize monetary, fiscal, and taxation policies. a. Monetary Union b. Political Union c. Economic Union d. Custom Union ANS: C PTS: 1 DIF: Easy REF: p. 249 OBJ: 8.3 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence and Legal Responsibilities 20. ____ represents complete integration of all public affairs. a. Custom Union b. Monetary Union c. Economic Union d. Political Union ANS: D PTS: 1 DIF: Easy REF: p. 249 OBJ: 8.3 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 21. The EU became the economic union when the ____ went into affect in 1993. a. Treaty of Rome b. Maastricht Treaty c. Treaty of Bristles d. Madrid Treaty ANS: B PTS: 1 DIF: Easy REF: p. 250 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 22. Which of the following best describes the European Union? a. United States of Europe b. Cooperation between governments, like the UN c. Is meant to replace existing nation states’ (local European) governments d. Pooling of sovereignty into a single, integrated entity ANS: D PTS: 1 DIF: Moderate REF: p. 250 OBJ: 8.4 NAT: AACSB: Tier 1 Communication; Tier 2 Environmental Influence 23. Which of the following was established within the Schengen countries in EU? a. A passport free travel zone b. Free flow of capital c. Free flow (migration) of labor d. All of these answers ANS: A PTS: 1 DIF: Easy REF: p. 250 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 24. Euro is: a. The currency currently used in all EU countries b. The currency currently used in all European countries c. The currency currently used in 16 EU countries d. The currency used in Schengen countries ANS: C PTS: 1 DIF: Easy REF: p. 250 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 25. Which of the following is NOT a benefit of adopting the euro? a. Reducing currency conversion costs b. Limiting the flexibility in fiscal policy c. Facilitating direct price comparison d. Imposing monetary discipline on governments ANS: B PTS: 1 DIF: Moderate REF: p. 252 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 26. Which of the following is the cost of adopting the euro? a. Unable to implement independent monetary policy b. Unable to reduce currency conversion costs c. Unable to facilitate direct price comparison d. Unable to impose monetary disciplines on governments ANS: A PTS: 1 DIF: Easy REF: p. 252 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 27. Which of the NAFTA members benefited the most from this free trade agreement by securing preferential treatment for 80% of its exports? a. US b. Mexico c. Canada d. All the countries benefited equally ANS: B PTS: 1 DIF: Moderate REF: p. 256 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 28. NAFTA includes: a. Canada, Mexico, and the United States. b. Canada and the United States c. Mexico, Brazil, and Argentina d. Brazil and Japan ANS: A PTS: 1 DIF: Easy REF: p. 256 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 29. Which of the following regional integrations is more pro-free trade oriented than others? a. Mercosur b. Andean Community c. Latin American Union d. CAFTA ANS: B PTS: 1 DIF: Moderate REF: p. 258 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 30. Which of the following regional integration is yet to be established? a. Mercosur b. Andean Community c. FTAA d. CAFTA ANS: C PTS: 1 DIF: Moderate REF: p. 258 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 31. Which of the following is the economic trade agreement between Australia and New Zealand? a. ANZCERTA b. ASEAN c. APEC d. ANZU ANS: A PTS: 1 DIF: Moderate REF: p. 258 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 32. Since the main trading partners of ASEAN members lie outside the region, ASEAN launched ACFTA to boost trade and investment with its closest partner, China. Which of the following countries is NOT a member of CAFTA? a. Four Tigers (Hong Kong, Singapore, South Korea, and Taiwan) b. China c. Japan d. EU and US ANS: D PTS: 1 DIF: Difficult REF: p. 259 OBJ: 8.5 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 33. What is the main reason the US, Canada, and Australia decided to join ASEAN and form the Asia-Pacific Economic Cooperation (APEC)? a. No one wants to be left out of the most dynamic region in the world. b. The APEC members desire closer economic integration. c. Common political/economic interests. d. All of these answers ANS: A PTS: 1 DIF: Moderate REF: p. 259 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 34. Which of the following countries was not included in ASEAN, but was included in APEC? a. China b. United States c. Japan d. All of these answers ANS: D PTS: 1 DIF: Easy REF: p. 259 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 35. Which of the following areas has the most ineffective regional economic integration? a. North America b. Eastern Europe c. South America d. Africa ANS: D PTS: 1 DIF: Easy REF: p. 260 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence ESSAY 1. Explain possible benefits and/or obstacles of global economic integration. ANS: The postwar urge for global economic integration grew out of painful lessons in the 1920s and 1930s. The world’s nation-state governments in the aftermath of World War II established most of today’s international regulatory and advisory institutions, such as the UN, WTO/GATT, World Bank, and many more, in order to promote peace by economic cooperation. Economic integration benefits the world. Countries are less likely to declare war on each other when there is faith in the dispute resolution system. The WTO represents an example of the expanding membership’s faith in the organization to solve trade disputes. Global economic integration promotes non-discrimination and a leveled playing field in most cases. The GATT/WTO system is called the multilateral trading system symbolizing the involvement of all participants. Non-discrimination minimizes trade complications and the formation of different sets of rules (withstanding bilateral or regional preferences, i.e. NAFTA, EU). When capital is flowing freely around the globe, manufacturing is established in the areas most suitable for production. Finally, when labor is flowing (moving) freely, individuals have freedom to utilize their personal skills by working in the industry of their choice, regardless on geographic location. The minimizing of trade barriers raises incomes, generates jobs, and stimulates economic growth. PTS: 1 DIF: Difficult REF: p. 240-241 OBJ: 8.1 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 2. Discuss the formation of GATT and the issues that precipitated the formation of the WTO (Post GATT). ANS: GATT was established in 1948. Unlike the WTO, GATT was technically an agreement but not an organization. The major contribution from GATT was reducing the level of tariffs by sponsoring rounds of multilateral negotiations. Average tariffs dropped from 40% in 1948 to 3% in 2005. GATT was successful in bringing down tariff barriers. However, it was clear that other reforms were necessary during the Uruguay Rounds. The reforms were triggered by three concerns: GATT’s focus on merchandise trade resulted in little focus on trade in services and intellectual property. GATT policies presented loopholes. In the merchandise trade, there were loopholes creating imbalances and limitations to the free trade. An example is the Multifibre Arrangement (MFA). The MFA was designed to limit free trade in textiles, a direct violation of GATT. The irony is that GATT’s success in reducing trade barriers led to the formation and growth of non-tariff barriers (NTBs). These NTBs included subsidies and local content to name a few. NTBs are sometimes transparent and very difficult to challenge. GATT’s ability to ensure free trade was related to GATT’s main challenge: the lack of a system or process for dispute resolution. Member countries filing dispute complaints received a comprehensive investigation and a recommendation. The weakness was that the final implementation recommendation was completely dependent on the will of all the involved WTO members. The WTO was established in 1995 as GATT’s successor. This transformation turned the agency from an agreement to a full-fledged international organization. GATT did not die, but was transformed into the WTO. Although today’s WTO has an established comprehensive enforcement mechanism, there are still challenges to be resolved. The main challenge is the NTBs (non-trade barriers). Barriers to trade include, but are not limited to, various subsidies and local content requirements. These trade barriers affect free trade without violating general WTO rules and regulations. PTS: 1 DIF: Moderate REF: p. 242 OBJ: 8.2 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence 3. Identify how the WTO addressed the former problems of the old GATT and how WTO executes their decisions. ANS: The WTO addresses problems as follows: 1. Time limitations for panel discussion and decisions. The panel is three neutral countries whose role is reaching a judgment. This judgment is titled the panel recommendation. 2. Power is removed from the accusing country to block any unfavorable decision. The WTO decision is final. 3. The WTO is nicknamed the “supreme court in trade.” However, the WTO does not have real enforcement capabilities. The WTO executes the final decision by recommending that losing countries change their laws or practices. They authorize the winning country to use tariff retaliation to compel the offending countries’ compliance with the rulings. Fundamentally, the WTO ruling is a recommendation and the country receiving the recommendation retains full sovereignty on whether or not to implement the panel recommendation. PTS: 1 DIF: Moderate REF: p. 243 OBJ: 8.2 NAT: AACSB: Tier 1 Analytic; Tier 2 Environmental Influence and Legal Responsibilities 4. Explain how the European Union, as an economic union, resolved some of the challenges of being in the euro zone. ANS: The EU is a single market in which businesses compete on equal terms. Most internal trade barriers have been removed. An example is the aviation industry. Any EU airline can fly between cities; however, US airlines are not authorized currently to fly these routes. Passport and customs checks were removed in 1992. French truck drivers were held up 24 hours prior to 1992 to cross into Spain. Checkpoints at borders are no longer required. The area of the EU countries is known as Schengen Passport Free Control Travel zone. Citizens of the first original 15 countries are allowed to work and live throughout the EU. For example, when Germany did not generate jobs, people in Germany relocated to Ireland. The introduction of the euro is the proudest accomplishment of the EU. The euro is in 12 of the EU countries, known as the Euro Zone. PTS: 1 DIF: Easy REF: p. 249-250 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 5. Discuss the challenges faced by the EU member countries sharing a common currency, the euro. ANS: Twelve EU members adopted the euro. Challenges these 12 countries face as members of an economic union is the lack of their ability to implement independent monetary policy. These countries no longer have the flexibility in establishing fiscal policy changes in their deficit spending. When a large number of countries share a common currency, risks are spread, creating potential free riders. These “free riders” may not handle their fair share in terms of overspending and not fixing their fiscal problems. To prevent this risk, the current 12 EU members must abide by the Stability and Growth Pact (SGP) formed in 1997, which requires the countries deficits’ be no more than 3% of GDP. PTS: 1 DIF: Difficult REF: p. 252 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 6. Discuss the future of FTAA and CAFTA ANS: In 1998, all Latin America countries (except Cuba) launched negotiations with Canada and the US for a possible Free Trade of the Americas (FTAA). In November 2005, Brazil, Paraguay, Uruguay, and Venezuela changed their minds and announced they opposed FTAA. Thus, the FTAA is on hold. In the absence of FTAA, the United States Dominican Republic-Central America Free Trade Agreement took effect in 2005. Modeled after NAFTA, CAFTA is made up of five Central American countries: Guatemala, Honduras, El Salvador, Nicaragua, and Costa Rica plus the Dominican Republic. Although small, the six CAFTA countries collectively represent the second largest US export market in Latin America. Globally, CAFTA is the 10th largest export market. PTS: 1 DIF: Easy REF: p. 258 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence 7. Discuss how the institution-based perspective accounts for the success of MNEs by focusing on regional opportunities. ANS: The slowdown of multilateralism and the acceleration of regionalism propelled managers to focus greater attention on regional levels in comparison to a wider global focus. The majority of MNEs that continued to grow their home regions through expansion recorded a greater amount of revenues from their regional locations. Examples are firms that chose to focus on the EU or NAFTA. The larger MNEs continued to have global presence. However, in analyzing their center of gravity (which is measured by revenues), the home regions are responsible for this income generation. Global strategies make good business sense. There are cultural, economic, and geographic similarities within a region. Understanding these dimensions may lower a firm’s foreign expansion liabilities. Managers need to understand the rules of the game, who the players are and what the rules represent at both global and regional expansion levels. Trade negotiations involve politics and negotiations. Executives cannot ignore the institutions that govern the trade policies. Successful international managers become skilled in developing corporate strategies, which shift over time to meet changes in locations, consumer preferences, and laws. By not assuming a “we don’t care about global trade agreements” attitude, managers are strategically positioned to be in control and conduct due diligence, allowing managers to better prepare for shifts in international business and to recognize opportunities regionally and globally. PTS: 1 DIF: Moderate REF: p. 262 OBJ: 8.6 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence and Strategy 8. Explain the formation of APEC. ANS: Founded in 1967, ASEAN was inspired by the EU’s success and set up the ASEAN Free Trade Area (AFTA) in 1992. ASEAN suffers from a similar problem that Latin American countries face: ASEAN’s main trading partnersthe United States, the EU, Japan, and Chinaare outside the region. In 2002, ASEAN signed an ASEAN-China Free Trade Agreement (ACFTA) to be launched by the early 2010s. Given the increasingly strong competition in terms of Chinese exports and China-bound FDI that could have come to ASEAN, ACFTA hopes to turn such rivalry into a partnership. Although ASEAN was deepening its integration, Australia was afraid that it might be left out and suggested in 1989 that ASEAN and CER countries form APEC. Given the lack of a global heavyweight in both ASEAN and CER, Japan was invited. Although the Japanese happily agreed to join, ASEAN and CER countries also feared that Japan might dominate the group and create a de facto “yen bloc.” Then the United States requested to join APEC, citing its long West Coast that would qualify it as a Pacific country. Economically, the United States did not want to be left out of the most dynamically growing region in the world. Politically, the United States was interested in containing Japanese influence in any Asian regional deals. Although the United States could certainly serve as a counterweight for Japan, the U.S. membership would also change the character of APEC, which had been centered on ASEAN and CER. To make its APEC membership less odd, the United States brought on board two of its NAFTA partners, Canada and Mexico. Canada and Mexico were equally interested in the economic benefits but probably cared less about the U.S. political motives to contain Japanese influence. Once the floodgates for membership were open, Chile, Peru, and Russia all eventually got in, each citing their long Pacific coast lines. APEC’s 21 member economies span four continents, are home to 2.6 billion people, contribute 46% of world trade ($7 trillion), and command 57% of world GDP ($21 trillion), making it the largest regional integration grouping by geographic area and by GDP. PTS: 1 DIF: Easy REF: p. 259 OBJ: 8.4 NAT: AACSB: Tier 1 Reflective Thinking; Tier 2 Environmental Influence