International BusinessInternational Business

Chapter SevenChapter Seven

Regional Economic Integrations Regional Economic Integrations and Cooperative Agreementsand Cooperative Agreements

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Regional Economic Integration Regional Economic Integration LogicLogic

Distance goods need to travel Distance goods need to travel between countries is shortbetween countries is short

Consumers’ tastes are likely to be Consumers’ tastes are likely to be similar (Small Psychic Distance)similar (Small Psychic Distance)

Distribution channels can be easily Distribution channels can be easily established in adjacent countriesestablished in adjacent countries

Neighboring countries may have Neighboring countries may have common history and interestscommon history and interests

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Basic Types of Regional Economic Basic Types of Regional Economic IntegrationIntegration

Free Trade Area (FTA): abolishes all tariffsFree Trade Area (FTA): abolishes all tariffs Customs union: eliminate internal tariffs, and Customs union: eliminate internal tariffs, and

place common external tariff on goods being place common external tariff on goods being imported from nonmembersimported from nonmembers

Common market: same elements as customs Common market: same elements as customs union plus allows free mobility of production union plus allows free mobility of production factors such as labor and capitalfactors such as labor and capital

Economic integration: economic harmonization Economic integration: economic harmonization through common economic policiesthrough common economic policies• Common currencyCommon currency• Political integrationPolitical integration

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Effects of IntegrationEffects of Integration

Static effectsStatic effects• Shifting of resources from inefficient to Shifting of resources from inefficient to

efficient companies as trade barriers fallefficient companies as trade barriers fall Dynamic effectsDynamic effects

• Overall growth in marketOverall growth in market• Expanded productionExpanded production• Greater economies of scaleGreater economies of scale

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Static EffectsStatic Effects

Trade creationTrade creation• Production shifts to more efficient producers Production shifts to more efficient producers

for reasons of comparative advantagefor reasons of comparative advantage• Consumers access more goods at lower pricesConsumers access more goods at lower prices• Less efficient products will failLess efficient products will fail

Trade diversionTrade diversion• Trade shifts to countries in the group at the Trade shifts to countries in the group at the

expense of trade with countries not in the expense of trade with countries not in the groupgroup

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European UnionEuropean Union Largest and most comprehensive regional Largest and most comprehensive regional

economic group economic group http://http://europa.eu.int/index_en.htmeuropa.eu.int/index_en.htm

Began as a customs unionBegan as a customs union Formed the Euro ParliamentFormed the Euro Parliament European CommissionEuropean Commission

• Initiates proposals for legislationInitiates proposals for legislation• Guardian of treatiesGuardian of treaties• Manager and executor of Union policies and trade Manager and executor of Union policies and trade

relationshipsrelationships• Manages the annual budget of the EUManages the annual budget of the EU

Established common currency (euro)Established common currency (euro) Expansion challengesExpansion challenges

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European Trade and Economic European Trade and Economic IntegrationIntegration

Map 7.1 7-8

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European Union IssuesEuropean Union Issues

Abolish the right of individual EU countries Abolish the right of individual EU countries to run their own foreign policiesto run their own foreign policies

Have the right to raise direct taxesHave the right to raise direct taxes Use common border controlsUse common border controls Integrate the European police forceIntegrate the European police force Influence national governments’ budgets Influence national governments’ budgets

much more stronglymuch more strongly Create a European president to run the Create a European president to run the

Council of MinistersCouncil of Ministers

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North American Free Trade North American Free Trade Agreement (NAFTA)Agreement (NAFTA)

Established in 1994 by:Established in 1994 by:• United StatesUnited States• CanadaCanada• MexicoMexico

Combined population and total GNP greater than Combined population and total GNP greater than 15-member EU15-member EU

NAFTA covers:NAFTA covers:• Market access (tariff and nontariff barriers)Market access (tariff and nontariff barriers)• Trade rules (subsidies and antidumping)Trade rules (subsidies and antidumping)• ServicesServices• InvestmentInvestment• Intellectual propertyIntellectual property• Dispute resolutionDispute resolution

Good example of trade diversionGood example of trade diversion7-10

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NAFTA Special ProvisionsNAFTA Special Provisions

Unique aspects of NAFTA include:Unique aspects of NAFTA include:• Labor lobby in US forced the inclusion of Labor lobby in US forced the inclusion of

labor standards such as the right to labor standards such as the right to unionize (to prevent massive job loss to unionize (to prevent massive job loss to Mexico)Mexico)

Improved working conditionsImproved working conditions Living standardsLiving standards

• Environmental lobby pushed for an Environmental lobby pushed for an upgrade of environmental standards in upgrade of environmental standards in Mexico and strengthened complianceMexico and strengthened compliance

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MERCOSURMERCOSUR

Established in 1991Established in 1991• BrazilBrazil• ArgentinaArgentina• ParaguayParaguay• UruguayUruguay

Generates 80% of South America’s GNPGenerates 80% of South America’s GNP Signed free trade agreements with Bolivia Signed free trade agreements with Bolivia

and Chileand Chile Negotiating with EU for free trade Negotiating with EU for free trade

agreementsagreements

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Association of South East Asian Association of South East Asian Nations (ASEAN)Nations (ASEAN)

Organized in 1967Organized in 1967 Member countries are Member countries are

protected by tariff and protected by tariff and nontariff barriersnontariff barriers

Tremendous potential Tremendous potential market opportunities-market opportunities-500 million consumers500 million consumers

http://http://www.aseansec.org/howww.aseansec.org/home.htmme.htm

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Latin American IntegrationLatin American Integration

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Commodity AgreementsCommodity Agreements

Attempts to counteract price Attempts to counteract price instability through:instability through:• Exercise of market power through Exercise of market power through

international commodity agreementsinternational commodity agreements• Stabilization of producer revenues Stabilization of producer revenues

through risk-management instruments, through risk-management instruments, such as commodities futuressuch as commodities futures

• Stabilization of government revenues Stabilization of government revenues through precautionary savings fundsthrough precautionary savings funds

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Organization of Petroleum Organization of Petroleum Exporting Countries (OPEC)Exporting Countries (OPEC)

Producer cartelProducer cartel Group of commodity-producing countries Group of commodity-producing countries

that control supply and pricethat control supply and price OPEC controls price by establishing OPEC controls price by establishing

production quotas on member countriesproduction quotas on member countries OPEC member countries produce 41% of OPEC member countries produce 41% of

the world’s crude oil and 15% of its natural the world’s crude oil and 15% of its natural gasgas

http://http://www.opec.org/www.opec.org/

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