Chapter 8: Preferential Trade Agreements
MULTIPLE CHOICE
1. Which type of preferential trade agreement has a common external tariff?
a. Free trade area.
b. NAFTA.
c. Customs union.
d. FTAA.
2. Which type of preferential trade agreement allows the free movement of labor and
physical capital?
a. Customs union.
b. Common market.
c. Free trade area.
d. NAFTA.
3. Which of the following is not a WTO requirement for a FTA or customs union?
a. It must eliminate barriers on “substantially all trade.”
b. It must form an economic and monetary union.
c. It must not make trade barriers to non-member countries more restrictive than those
in existence before the formation of the FTA or customs union.
d. It must eliminate barriers among members within a reasonable length of time.
4. Which of the following is not an element of a common market?
a. Elimination of trade barriers.
b. Free movement of labor.
c. Free movement of capital.
d. Political union.
5. Which of the following was not included in the NAFTA agreement?
a. Common external tariff.
b. Elimination of tariffs on goods.
c. Liberalization of foreign direct investment.
d. Intellectual property protection.
6. Which of the following was not included in the NAFTA agreement?
a. Liberalization of trade in financial services.
b. Free movement of labor.
c. Dispute settlement.
d. Government procurement.
7. Which of the following is not an element of Mercosur?
a. Monetary union.
b. Attempt to establish a customs union.
c. Free movement of physical capital.
d. A and C.
8. When do rules of origin become relevant?
a. In a free trade agreement (FTA).
b. In a customs union (CU).
c. To prevent tariff rate arbitrage.
d. A and C.
9. Which of the following is an example of regionalism as a stumbling block vis-à-vis
multilateralism?
a. Multilateralized regionalism.
b. Preferential trade agreements reducing international conflict.
c. The proliferation of overlapping rules of origin.
d. Tightening of conditions in the Understanding on Regional Trade Agreements.
10. In the diagram below, which area reflects the degree of trade diversion?
a. Area A.
b. Area D.
c. Area E.
d. Area C.
TRUE/FALSE
1. In a preferential trade agreement, the WTO only requires that member countries lower
their trade barriers against each other, not eliminate them.
2. Trade creation is the switching of imports from a low-cost source to a high-cost source.
3. Trade diversion is the switching of imports from a low-cost source to a high-cost source.
4. The European Union has failed to build a common external trade policy.
5. A change in tariff heading (CTH) is one example of a rule of origin.
6. Preferential trade is not covered in the Agreement on Trade in Services (GATS)
7. Preferential trade agreements are violations of the most-favored nation (MFN) principle.
SHORT ANSWER
1. What is a rule of origin and what is its purpose.
2. Under what conditions does the WTO allow for preferential/regional trade agreements?
3. Please distinguish trade creation and trade diversion.
4. What is the evidence on trade creation vs. trade diversion in the European Union?
5. Why didn’t NAFTA follow the Stolper Samuelson theorem of the Heckscher-Ohlin
model and adversely affect workers in the North?
6. Why has Mercosur failed to deliver on its promises?
7. How has the WTO Understanding on Regional Trade Agreements helped to clarify the
role of RTAs in the WTO?
8. What are the elements of “new” or “open” regionalism?